Analysis: With premium finance commissions under FCA threat, are brokers doing anything wrong?

The downpour of regulation on brokers is turning into a flood in 2019.

So far this year we’ve had a report slamming insurance firms’ failure to offer consumers value for money and brokers reeling under the impact of the FCA dual pricing crackdown.

Then yesterday, the FCA’s 2019/20 business plan revealed how it will likely force firms to regularly report value measures data by 2021.

Arguably the biggest threat for brokers, though, is the impact of an FCA review into motor car finance – it could lead to a clampdown on the commissions they make on premium financing. 

But are brokers actually doing anything wrong with commission they charge on this vital source of their income? 

No, says Hassan Soyer, director of Romford-based broker Nova Insurance.

When it comes to limiting what commissions brokers can add on to premium finance arrangements, Soyer warns it could be consumers that lose out over such requirements.

“What brokers are doing isn’t necessarily wrong,” he said. “Yes, a crackdown might drive the cost of financing down, but brokers will end up being more fussy about who they put on finance agreements. There will be a lot more credit checking going on.

“By charging commission it means that somebody with a car doesn’t need to have the greatest credit rating in the world to get financing. My concern is it could end up much more difficult to obtain finance if the FCA steps in.”

Pushed boundaries

Nova offers payment of premium via instalments through its own company Nova Premium Finance – meaning it doesn’t add on extra commission, and would gain from any FCA action. It currently lends £5m a year.

Yet Soyer still believes add-on commissions of less than 15% can be justified by the high risk those brokers are taking on with bad debt.

Beyond 15% though, he says the customer is being asked to pay too much.

“I do understand why brokers charge what they charge, but some of them have no doubt pushed the boundaries,” Soyer added.

Consumer Intelligence reports that some brokers make up to one-third of their profit via revenue generated through premium finance arrangements.

While the median broker add-on commission was found to be 12.2%, the cost of credit ranged from 4% to 22%, with the worst offender charging a customer 63.1% on top of their premium.

Soyer says that given how fundamental premium finance incomes are to some brokers, any crackdown could also result in fees and charges being increased to the customer elsewhere.

“The customer will still be charged, but charged in a different way,” he said. “It’s become too much of a valuable source of income for brokers to cut their money and just to not earn it.  Without that a lot of brokers wouldn’t even make a profit.”

Increasing use of credit

The findings come at a time when premium finance incomes are increasing.

Hastings saw its premium finance interest revenues grow from £94.4m in 2017 to £104.0m – a 10% increase in a year when net revenue overall increased by only 6%.

A comment in Hastings’ annual report said the increase was a result of higher average premiums and an increase in the number of customers choosing to pay in monthly instalments.

Labour MP John Mann recently made headlines criticising both brokers and insurers for the add-on costs they apply to customers. Direct Line reportedly earned £119.9m last year through interest added to instalment payments, while Admiral made £81.4m.

But Hastings has defended the practice. A spokesperson said: “Our ancillary fees and charges are in line with others in the market and our premiums are some of the most competitive.

“Unlike some others, none of our charges are hidden and they are clearly presented when a customer buys from us. Reported income numbers cannot be compared as they are not like for like, due to different accounting practices.”

As claims inflation looks likely to push up motor premiums this year, the trend of increasing uptake of paying by instalments looks set to continue.

Premium Credit research has revealed that 41% of insurance customers are relying on credit more in response to price rises in motor, home, pet, travel and life premiums. However, the same survey found credit cards were the most popular form of borrowing, being used by 60% of customers to spread the cost of insurance. This compared with 39% planning to use premium finance this year. Around 13% are borrowing from family, while 4% are turning to high-cost credit including payday loans.

Brokers may have to start offering cheaper rates to compete with credit cards as a means of financing insurance. Premium Credit chief executive Tom Woolgrove has said the firm educates brokers to ensure their rates are competitive, particularly to turn them away from payday loans.

Responsible

Simon Pearce, Gallagher Insurance Solutions chief operating officer, said the evidence suggests most brokers act responsibly over charging customers for premium finance.

“The regulatory regime under which we operate means the total cost is well explained and has to be,” Pearce said. “A barometer of whether that is true is to look at the number of complaints, and looking at our regulatory returns and our consumer credit complaints, we just don’t see a customer saying that I was taking this out and it’s more expensive than it should be.

“As long as you’re setting it out properly, it’s an optional product that consumers choose to take.”

While Ravi Takhar, chief executive of premium finance lender Bexhill, has told Insurance Times he believes the add-on commissions being charged by brokers are “unacceptable”, Premium Credit does not agree.

Premium Credit non-executive director Simon Moran argued that brokers largely sit within fair limits on what they charge customers for premium finance.

“We don’t see excessive payments being made, and they sit well within other borrowing costs,” he said. “Brokers are very alert to the whole regulation piece and how they are perceived by the customer, their peer group and the regulator, so we don’t see behaviours that worry us. It’s rare, and when we do see them we engage constructively.”

Soyer warns the FCA to tread carefully on this issue to avoid consumer harm. Brokers argue they are on the right side of treating the customer fairly, and onerous intervention could deny access to insurance for those who most struggle to pay for it.

But extreme examples point to this being an issue the FCA will show interest in to determine what is a fair cost of credit, and increasingly so as buying insurance in this way becomes more popular.