FCA report could result in a clampdown on add-on premium finance commissions charged to customers by brokers
Brokers that add on hefty commissions to consumer premium finance credit agreements are facing the prospect of a major clampdown following an FCA report this week.
In the report on motor finance, released on Monday, the regulator states 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.
Insurance broker implications
While the report focuses on car finance, premium finance provider Bexhill chief executive Ravi Takhar says the report has major implications for insurance brokers adding commissions on to all consumer premium finance policies.
“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.”
He confirmed that the premium finance lender is now reviewing the add-on commissions applied to consumer policies for all the 200+ brokers that it deals with.
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.”
But Takhar was supportive of the FCA’s report, and said it would be fairer to consumers. He said he knew of brokers that add up to 16% on top of the 3-4% flat rate applied by premium finance providers, and said this was unacceptable.
He estimates £3bn is borrowed a year in premium finance by consumers across the UK. With an estimated average add-on commission of 5%, the move could cost UK insurance brokers up to £150m.
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, 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.”
Biba has recommended 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 week’s 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.”
Close Brothers was contacted for comment, but Insurance Times was told it wants time to find out more, see what develops, and consider the implications before it forms a view.
Insurance Times contacted the FCA for comment, but none had been received at the time of publication.