With some customers being charged up to 63% extra to pay motor insurance premiums by instalments, commissions being levied by brokers are coming under the spotlight

On the surface it was an innocuous report on motor financing.

It easily could have passed the insurance industry by without notice, but the content within it has the potential to dramatically interrupt a central income stream of the majority of brokers in the UK.

The report was damning in its verdict of the current commission arrangements in motor financing, which were deemed unfair to the consumer.

The FCA stated it is “concerned that the way commission arrangements are operating in motor finance may be leading to consumer harm on a potentially significant scale”.

It says that change is needed across the market to address the consumer harm and it has started work assessing how it could intervene. Options include a ban on broker commissions or limiting broker discretion on commission levels.

At least one premium finance provider has interpreted this to signal a crackdown on all add-on financing commissions. Other providers are watching the situation closely to see whether they will have to issue clear instructions to brokers to clamp down on their hefty add-on commissions to premium finance arrangements.

Intervention

As premium financing is not distinguished from any other financing arrangement by the FCA, Ravi Takhar, chief executive of premium finance provider Bexhill, is certain that this report indicates the regulators intention to step in to stop high commissions being added to premium finance arrangements with customers.

“A car finance credit broker has exactly the same regulatory permission as a premium finance credit broker,” he said. “Car finance and premium finance is not separately defined by the FCA.

“What they’re basically saying is either stop adding on these commissions, or we’re just going to ban it completely.”

Should the FCA follow through, the implications would be huge.

Consumer Intelligence data provided to Insurance Times reveals 31.5% of motor insurance buyers pay in instalments, with the overall cost to the consumer of paying in monthly instalments varying widely.

In one case a customer was paying £699.61 for a premium that would have cost £428.92 as one lump sum – equating to a 63.1% cost of credit.

The lowest cost of credit found was 4.1% - close to what Takhar says is the standard commission added by premium finance providers of 3-4%.

Data also revealed a range within distributors. One brand could offer credit of 4.6% to one driver and 14.8% to a different driver.

Across a basket of 3600 risks from 115 brands, the average cost of credit per brand ranged from 4% to 22%. The median cost was 12.2%.

Factor in the 3-4% commission added on by the premium finance provider and the estimated £3bn borrowed a year in premium finance by UK consumers and a crackdown on broker add-on commissions could cost up to £261m.

premium finance graph

The high cost of instalment fees, which in the case of some personal lines brokers accounts for a third of their total turnover accordng to Consumer Intelligence, is driving consumers towards putting the cost of buying insurance onto their credit card. While the popularity of premium finance as a payment method has remained fairly level since dropping by 10% in the first six months of 2017, Consumer Intelligence data suggests this is only due to a decline in popularity of making a single payment. This means it is banks that are profiting from the cost of financing as opposed to brokers.

But Takhar was supportive of the FCA’s report, and said it would be fairer to consumers, saying the current levels of commission added on by certain brokers to premium finance arrangements was unacceptable.

Takhar added: “Brokers who rely on this income to make their businesses viable won’t be able to rely on this income in the future.

“Some of the large volume-based brokers don’t make any money on the insurance, they make it all on the commissions on premium finance, so if that commission is taken away then their business models are bust.”

He confirmed that the premium finance lender is now reviewing the add-on commissions applied to consumer policies for all the 200+ brokers that Bexhill deals with.

He added: “Historically lenders have provided very competitive net rates to brokers, but brokers have added on to that rate to make it more expensive for customers to take the finance.

“What it does for our company is level the playing field. So, you can’t be doing a deal with one premium finance provider and charging one huge rate.

“All the premium finance providers will have to effectively offer the same rate to the insurance broker, and the broker won’t be able to top that up to the disadvantage of the consumer.”

Takhar suggested that the only way brokers could protect their commissions is by becoming a lender themselves.

He added: “Ultimately financial services in today’s market is about being fair to the customer, and today’s premium finance commission structures aren’t fair to the customer.

“It’s another point that the industry has got away with for a long time, and the FCA is now stamping down on it.”

Premium Credit

Premium Credit, one of the two largest UK premium finance lenders, has also indicated that the report will have implications for insurance brokers.

“The thematic questions raised in the FCA’s Motor Finance review are clearly relevant for insurance brokers and premium finance providers,” said Tom Woolgrove, Premium Credit chief executive.

But he added that there are “fundamental differences between the sectors that mean the identified risks to poor customer outcomes are mitigated”.

Woolgrove said that most finance commissions are agreed by the lender and fixed as part of the overall agreement with brokers. But where brokers do have discretion on the commission, he said it was for those larger brokers to reduce them and lower the consumer’s rate.

He added: “It is right that brokers ensure they have appropriate conduct policies in place to ensure appropriate disclosure of commissions, as well as appropriate internal rules if insurer 0% schemes or other finance arrangements are in place, to demonstrate customers get the best outcome for their needs and this is an area we seek to monitor.”

While Takhar advises brokers to act now to avoid FCA sanctions further down the line, it seems others in the industry are waiting for more clarity from the FCA before making a move.

Close Brothers, the second major player in UK premium finance alongside Premium Credit, was contacted, but Insurance Times was told it wants time to find out more, see what develops, and consider the implications before it forms a view.

But the signs are brokers should start to show caution if they are charging excess commissions on premium finance. Biba itself is recommending that all brokers read the report to understand what the implications may be for their firm.

David Sparkes, Biba’s head of compliance, said: “This FCA report is focused on motor finance provided by motor dealers. However, there may be some read-across of their findings to brokers’ use of premium finance and we are suggesting that our members may benefit from studying the report and reviewing their own practices.”

It could be wise advice. History has shown where there is unfair treatment of consumers, the FCA is keen to take action. As it steps up its interest across GI, add-on premium finance commissions could well come under the regulators gaze.

With the data available suggesting the FCA could well interpret the current practice as unfair to consumers, those brokers reliant on this income for a substantial proportion of their profits may want to start taking action to their business model sooner rather than later to remain in line with future regulations.

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