Thousands of brokers and intermediaries may have to renegotiate their arrangements with premium finance houses if they sign up with the industry's fledgling regulator, the General Insurance Standards Council, it emerged this week.
Rule G28 calls for intermediaries to make “adequate provision for any debt which is unlikely to be received from the debtor”.
Industry experts were divided about the repercussion that this rule will have, but at worst it could result in small brokers and intermediaries paying a higher rate for their premium financing.
There is confusion among both GISC board members and premium finance houses about what the wording “adequate provision” will actually entail.
Currently, the personal lines premium finance market is estimated to be worth more than £1bn with 90% of brokers using recourse facilities – meaning they have to pay when policyholders default.
Some experts now claim that under the GISC rule, intermediaries should have to switch to non-recourse deals whereby the premium finance house takes the burden of responsibility for bad debts instead.
The ruling has already prompted some GISC member-brokers to take out non-recourse funding. GISC board member Simon Bolam has taken a non-recourse facility with Amber Credit.
He said: “There is an incentive (in GISC's rules) to use an external finance provider, and the fact Amber offers a non-recourse service was important in our decision to use it.”
And GISC's head of policy, Angela Darling, said the rule means it is “definitely” safer practice for small to medium-sized brokers to use non-recourse premium funding instead of recourse.
But premium finance houses were still trying to assess the impact of this rule on their business.
Ian Jerrum managing director of Tifco agreed the rule will work in favour of non-recourse providing premium finance houses.
“The GISC rules strongly encourage intermediaries to opt for non-recourse premium finance,” he said.
“Rule G28 states that intermediaries must make adequate provision for any debt and if the intermediary is using a premium finance company that operates a recourse policy (as most of them do) provision must be made.”
But the biggest player, Premium Credit, denied the move would cause disruption to brokers.
Sales and marketing director Simon Pearce said: “Premium Credit is built on the premise that brokers expect a return of premium to balance contingent liability, so I don't see how this rule could cause disruption.
“However, I do believe it will encourage brokers to use third party premium finance companies rather than offer their own extended credit.”
The rest of the premium finance market said they would watch developments closely.
Prompt managing director Bob Golden said his company could create a non-recourse service, if broker reaction to the rule is strong.
He said: “At the moment I honestly don't know if this will become an issue for brokers – it is very early days. But if it does become a problem then we will listen to our brokers and move in line with what they want.”
And Finsure managing director Paul Chaplain said: “Certainly this brings premium finance into sharper focus but brokers have always had to make provision for client insolvency.”
Meanwhile, brokers and intermediaries were in the dark about whether they would meet GISC's solvency margins using recourse agreements.
Paul Robinson, owner of intermediary Robinson & Robinson, said: “The question is, ‘If you have a recourse facility, how do you keep a track of good debts and bad debts every day to make sure you meet GISC's requirements?'”
