Competition in premium finance – Really?

It’s interesting to note the definition of unfair market domination under competition guidelines. Where a company controls over 40% of a market there is assumed to be unfair control of a market, which in turn is assumed to mean the market is not properly competitive.

In the UK two companies control over 90% of the premium finance market. The companies have systematically taken measures to prevent new players from entering the market and have done an excellent job of keeping the market to themselves for over 20 years.

How have they managed to do this?

For a start premium finance is provided to brokers on the basis that they cannot use any one else for a period of time – this can be up to 3 years.

Commissions are often paid in advance. Before a broker has even written and introduced a premium finance deal to the lender. This in effect prevents a new finance provider from entering the market as the broker becomes completely reliant on the advance commission check as working capital for its business.

Say a new knight enters the market and provides a competitive offer to a broker. After years of charging a higher rate, the mythical dragon premium finance provider in its benevolence reduces its rate to avoid a new competitor entering the market.

Add to this integration into broker software systems and multi-million spend on IT systems you can see why no new knightly competition can exist in the market and all new competition is effectively kept out.

Well you may think this is not so bad for the broker. A broker is still able to play the two mythical dragons off against each other and get the best deal so who cares – happy days as a broker grinds the two beasts down and gets a brilliant deal for himself.

Let’s pose a theoretical problem. What if the gang of two dragons decide to act in together to increase rates to all brokers. The lack of competition in the market will mean that brokers will not have any options. Further, what if the private equity owners of one of the beasts decides that they can’t be bothered with the market any more. Oh dear – only 1 lender left and that can’t be good for the broker – can it?

Finally what if the regulator passes a rule, which says that the 2 dragons have to limit the commissions brokers can earn from their premium finance business ( by the way, this is coming from the regulator) – with the limited competition what options will the broker have? None!

We need some knights to fight the good fight, but the dragons keep trying to burn them alive!