The Financial Conduct Authority (FCA) estimates that over 20 million adults in the UK use premium finance to spread the cost of their insurance. It's a vital product for many consumers who wouldn't otherwise be able to afford an annual premium.
However, the regulator is concerned that these products aren't offering fair value to customers and that competition isn't functioning properly, so it has launched a market study (MS24/2.1). The Supreme Court is also expected to issue its judgment on commissions in July, which could have a potential impact on the wider premium finance market.
Premium finance is expensive in relation to the low credit risk associated with the product, raising questions about fair value. The average APR for premium finance is 20-30%, but certain providers offer the product for free on some policies. When a consumer defaults, there isn't a long grace period before the policy is cancelled – which avoids further risk to insurers or intermediaries. This is in contrast to other credit products, where the lender bears that risk until any default is corrected.
The cost of premium finance disproportionately affects vulnerable consumers. The FCA has noted that 79% of adults in financial difficulty have used it.
The regulator is also concerned that complex commercial arrangements between parties across the supply chain and poor consumer information is limiting customers’ ability to make effective decisions.
The review is looking at how providers set their prices, how they compete in the market, and whether customers are able to compare prices and shop around.
In particular, the study will investigate whether commissions between intermediaries and premium finance providers might create conflicts of interest and misalign incentives, leading to customer harm.
These aren't the first concerns that the regulator has raised around fair value in premium finance. For example, in 2018 the insurance distribution directive required firms to undertake product value assessments of all add-ons, including premium finance. Since then, the general insurance pricing practices rules (2021), several Dear CEO letters (2019, 2021 and 2022), and most recently, the Consumer Duty have all strengthened the requirement to show that premium finance offers ‘fair value’ to the consumer.
However, the FCA is clear that “the premium finance market is falling short of the standards we want to see from firms”, and this review should be seen as a statement of intent that firms will be expected to have substantive responses.
The question around commissions was amplified by a Court of Appeal ruling stating that these arrangements are unlawful unless they've been disclosed to the consumer, and that they've given informed consent to the payment. Although this ruling was in relation to commission arrangements in the motor finance sector, it potentially affects all credit agreements introduced by third-party brokers in receipt of commission, including premium finance providers.
The Supreme Court heard an appeal on this ruling in early April 2025, and a decision is expected in July 2025. If the judgment holds, it could have significant consequences across the credit market for the payment of commissions, opening the door for complaints and remediation, creating potential market instability.
Premium finance providers should monitor developments carefully to see how it may impact commission structures in the sector, and in turn the impact on business viability and profitability for both brokers selling premium credit, a significant percentage of their revenue stream, and underlying lenders.
The outcome and impacts of of the FCA and Supreme Court actions are currently unknown, but the direction of travel is clear and firms should do what they can now to prepare.
The onus will be on firms to demonstrate how premium finance-related charges provide fair value to the end-consumer, and make it clear that this makes the contract more expensive. It's important that firms get this right to avoid the risk of remediation down the line. Preparatory work now will reap benefits later.
Management should undertake granular financial forecasting and scenario-modelling to understand what the consequence would be to their working capital, profitability, and business model as a whole if premium finance charges need to change. This should include modelling different redress scenarios in the event that consumer remediation is necessary.
Prepare for the possibility of an APR cap – for some insurers and intermediaries, revenues made from selling premium finance to consumers can be a significant portion of their overall income. Firms may be reliant on the income generated by premium finance to compensate for smaller margins on the underlying insurance product. For example, research reported by the Financial Times has shown that should the FCA limit the APR on premium finance to 15%, it could reduce earnings of two major insurers by 8%. Again, detailed financial forecasting and modelling should be undertaken to create visibility on what a potential cap on APR could mean for the firm.
Lenders and investors to premium finance providers may want to undertake due diligence to understand what proportion of revenue derives from premium finance, and if this ancillary business were reduced, how it might affect their ability to comply with covenants or repay any loan.
Detailed ‘what-if’ scenario analysis can help firms be prepared for any impact on the financial and operational resilience of their business.
For more insight and guidance, contact Will Stagg.
