Context
The FCA has published a draft Terms of Reference, which is open for ‘comment’ (not consultation) until 18th November 2024, for a Market Study into “whether people who borrow to pay for motor and home insurance are receiving fair, competitive deals.” This will be a piece of competition and fair value work founded in concerns about rising prices, and will be “a package of work” alongside the launch of the Government motor insurance taskforce. The FCA sates that it is launching this market study because:
- premium finance is an important product for many customers;
- it has been concerned about premium finance for some time;
- it is concerned that premium finance may not represent fair value for some customers and that competition may not be functioning effectively; and
- rising premium prices may be making the situation worse.
Key points to note and next actions
- In its press release the FCA states that it sees an “…average yearly rate on the amount of money borrowed ranging between 20 to 30%…”. If anything, firms may wish to remind the FCA about the difference between an interest rate and an APR. The 20 to 30% figures are more likely to be APRs than interest rates.
- The FCA states that over 20 million people are estimated to pay for their insurance using premium finance, and the FCA makes a link to (fairly obvious) research which shows that 79% of adults in financial difficulty have used the product (adults in financial difficulty are much less likely to be able to afford insurance premiums in one amount than those not in financial difficulty).
- The FCA will review:
- whether the products represent fair value;
- how well customers are made aware of their financing options;
- the role of commission; and
- other potential barriers to effective competition.
- The FCA has previously written to the insurance industry (PDF) regarding premium finance products with high APRs but low credit risk.