Premium finance: a greater focus on fair value assessments

The FCA has concluded its two-year premium finance market study, to assess whether the market is operating effectively and whether consumers are receiving fair value under Consumer Duty. In keeping with its interim report, the FCA has opted not to introduce a ban on commissions or a cap on APR. However, firms must assess their current processes and underlying management information to support fair value assessments.

Current rules are sufficient 

While the FCA has noted isolated instances of poor practices, it believes the current rules are sufficient to address those behaviours and has already seen positive changes in the market through supervisory engagement. It also highlights, that although price is important, fair value is key, and consumers must receive reasonable benefits in relation to that cost. As such, it will continue to challenge firms that have high prices that aren’t robustly supported by a fair value assessment. 

No market-wide APR cap  

Increased scrutiny over the price of premium finance has already led to changes in firms’ pricing models including a reduction in APR, reflecting around £157m in annual savings for consumers since 2022. This reflects an average drop of 4.1 percentage points, which increased to 7 percentage points for firms directly challenged by the FCA. The figures equate to around £8 reduction per motor policy, and £3 for home insurance. 

A ban on interest could increase consumer premiums, with firms using other mechanisms to recover income. Firms would see a simultaneous rise in operating costs as more people would be encouraged to switch to monthly payments. It could also exclude financially vulnerable customers, by limiting premium finance to those with lower credit risk.

No price cap 

A price cap would only impact firms charging the highest prices, and there’s a risk that lower-charging firms could view the cap as an industry benchmark and raise their prices accordingly.

No ban on commissions 

Where the FCA finds evidence of disproportionately high commissions, it will address these through fair value rules under Consumer Duty.

Premium Finance - the interim findings

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Ensuring fair value 

With significant price variation across the premium finance market, the FCA reviewed fair value assessments for higher-priced products to gauge whether costs were fair to consumers. In doing so, it noted that weaker fair value assessments typically fell into three categories:

• Inadequate methodology – with no fair value assessment documents or details of the target market, meaning firms can’t determine whether a product offers fair value, or respond accordingly.
• Incomplete methodology – where a firm has carried out an analysis, but it doesn’t have a robust basis to support its approach or final conclusions (for example through a limited view of benchmarking or reliance on profitability limits).
• Fair value policies are in place but aren’t followed – for example, to uphold expectations when working with manufacturers or distributors.

Keeping those quality markers in mind, the FCA assessed the following topics, finding evidence of good and poor practice for each. Moving forward, premium finance firms can consider these topics when carrying out fair value assessments to support good customer outcomes: 

• Target market – including appropriate consideration of key characteristics, motivation for buying the product and additional risks or costs incurred by the provider.

• Costs – a detailed breakdown of costs with consideration of market positioning against competitors, risk-based pricing, and any pricing adjustments driven by cost or customer outcome reviews.

• Quality – including complaints, affordability issues and lessons learned analyses to improve customer service or staff training. 

• Supporting customers with characteristics of vulnerability – with a focus on identification, support, costs and risk and adjusted benchmarking, recognising that cohorts for specific products may be more likely to be vulnerable.

• Collaboration – between specialist premium finance providers (SPFPs) as manufacturers and brokers as distributors to analyse brokers’ fair value assessments, with frameworks in place, regular reviews, and effective challenge to any changes in the offering.

• Cross-subsidisation – to ensure premium finance and the underlying insurance product complement each other through practices such as reducing insurance costs to offset premium finance costs. 

Creating robust fair value assessments

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Reviewing pricing models 

The FCA looked at 0% and ‘with interest’ premium finance pricing models to assess the impact on consumer understanding, fair value and competition. For 0% APR products, which are more common for home insurance, all prices are factored into the premium, while with interest products typically charge around 10-35% APR. This could potentially affect consumer understanding and comparability of products. 

However, the FCA found that the majority of consumers use price comparison websites (PCW), which predominately feature ‘with interest’ products, and rank them by cost. In contrast, most interest-free premium finance products are sold directly to consumer by the insurance providers. Once a consumer looks into an offer on a PCW, they are directed to the insurer’s website, which typically outlines the cost of paying annually or monthly. The FCA is satisfied that this supports consumer understanding and comparability.   

Assessing the distribution chain 

Intermediary brokers offer consumers the opportunity to pay for SPFP products in monthly instalments, taking on a range of administrative tasks and the risk of bad debt. It’s typically the most expensive premium finance option for consumers, but SPFPs have controls in place to manage pricing, such as interest caps or contractual bans on commission levels. However, their effectiveness may vary and may be treated as a compliance exercise. 

The FCA highlights that broker commission totalled 55% of the total cost of credit when financed by SPFPs. Profit margins are materially higher than the 36% FCA had originally calculated, as some self-reporting costs in fair value assessments were already incurred through the wider course of business. The regulator has already taken action under fair value rules to remedy poor practices.

The FCA also assessed contractual arrangements, noting the following:

• brokers have greater bargaining power than SPFPs, but competitive pressure from PCWs limits fees

• exclusivity arrangements could potentially impact broker discretion, market dynamics and customer outcomes but the FCA hasn’t seen evidence of harm in the premium finance market.

Comparisons with motor finance

There are material differences between premium finance and motor finance commission, despite superficial similarities in the business model. The FCA states that premium finance commissions are not discretionary commission arrangements as “brokers cannot change interest rates (and so affect their commissions) on individual customer deals”. Additionally, the premium finance sector differs as it relies on different commercial structures between brokers and lenders, with less broker discretion.

Pure Protection interim report - a positive outlook

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Next steps

While the FCA’s final report on premium finance doesn’t propose any widespread interventions, it will continue to monitor the market to ensure firms offer fair value to consumers. The regulator reiterated this point with its article ’What do we mean when we say fair value’, which was published alongside the final report. It serves as a clear mission statement that the findings don't reflect inaction, but action within pre-existing rules.  

Moving forward, the focus is shifting to fair value assessments. Firms should review their pricing and distribution models to ensure fees are reasonable in relation to the risk, services and benefits of premium finance. Robust fair‑value governance is crucial to support decision‑making processes that are agile enough to respond to changing price dynamics. This will maintain a business that is driven by consumer interests, while supporting a strong commercial perspective and continuing to build market share.

Firms that cannot demonstrate fair value – on an ongoing basis – and do not take action to remedy shortcomings, will face greater scrutiny and firm specific action.

For further information on premium finance contact Jon Sperrin, Peter Lovegrove or Emma Wilson.