​Proposed premium finance commission rules – what does it mean for brokers?

Premium finance provider Bexhill Insurance is raising awareness about the proposed change to commission rules ahead of its potential release

in the second quarter of this year. It is offering brokers free advice to help them understand the changes they may need to make to their documentation, the amount of commission and how they charge it, to comply with the new legislation.

The FCA has been in consultation on proposals to ban premium commission models that give brokers and motor dealers an incentive to increase customers’ interest rates, as well as amending parts of the rules and guidance relating to the disclosure of commission arrangements with lenders. Brokers will therefore have to declare the nature and the source of these earnings.

Ravi Takhar, co-founder and chief executive of Bexhill Insurance told Insurance Times that the concern is that brokers will need to change the way they do business and charge commission and, as a minimum, documentation will need to be changed. This could also mean that premium finance firms would have to keep offering cheaper commissions to stay competitive.

Brokers faced major change last October on the way they received premium financing after the FCA began cracking down on car finance. It saw a ban on add-on commission, instead enforcing a fixed fee – a move that could put some brokers out of pocket.

Chris Meyer, sales director at Bexhill Insurance and founder of sister company Orchard Funding said: “A broker is a broker – they have all got regulation from the FCA. The insurance brokers see the finance side as an add-on, as opposed to a primary source of income. 

“A lot of the time, they think it doesn’t affect them as they are not finance brokers, but they are broking finance products. So, they are affected by exactly the same rules, but they haven’t had ‘insurance’ tagged on to that headline that says, ‘you can’t do that anymore – it’s unfair’.”

Clear disclosure

Mike Cranny, compliance consultancy director at Create Solutions, said: “Some brokers interpreted that this rule did not apply to them, so they didn’t have to disclose where they were making instalments and where they were getting commission – this rule makes it clearer.

“If brokers are not already doing so, when the rules come out, they must disclose the nature and source of their commission.”

Also, a broker has to disclose all sources of credit. He reiterated Meyer’s point on credit brokers – all insurance brokers are considered credit brokers according to the FCA. 

There are two different types of finance – non-recourse and recourse. A recourse scheme is where, if the client defaults, the lender comes back to the broker for the money – therefore the broker runs the risk, so gets a commission. A non-recourse scheme is where, if the client stops paying, the premium finance provider has a bad debt.

But Cranny made clear that brokers do not have to disclose the level of commission, only the existence of it. He added that the new rules will change what the broker says to their clients.

Meyer said: “Both finance brokers and insurance brokers are regulated, but they have different regulations to adhere to. It’s making [insurance brokers] aware that they are subject to different regulations.”

Takhar gave the example of a broker getting finance charging 20% and getting the money at 3% – they are profiting 17%. “The second thing is that, whatever commission you are actually charging, the FCA have said that you need to disclose that to the customer,” he added.

Takhar said that the message he hopes to get across to brokers is what should be disclosed and what the proposed changes are, so that firms are aware of whether they are complying or not.

Subject to change

All brokers have a finance income and a premium income – the former is more often greater. However, brokers also charge lower rates for new customers and in the second year are required by the FCA to ask customers to shop around. Therefore, if the customer does that and the broker does not retain their business, it could put them out of pocket as they will not recover the reduced price that they charged in the first year.

Takhar said that these rules could change after the FCA consultation.

Cranny said that it clarifies for brokers something that it should be doing, but are not. The FCA has clarified the existing rules and brought some new rules in on motor finance.

For all insurance policies, clients must be told how brokers are paid. This is due to the FCA finding a high incidence of firms not complying with some rules and guidance on the information that they should disclose to customers.

In the example of a motor policy, the broker will charge an admin fee, subsequent charges for changes, commission from the insurer and, if it is paid in instalments, a commission from the lender. On top of this, if the policy is cancelled there is a cancellation fee.

It affects all motor finance providers, motor finance credit brokers, motor dealers as well as brokers regulated by credit and consumer hire agreements. But it will also be of interest to trade bodies representing consumer credit lenders and consumer organisations.

Takhar added that these rules could change after the findings of the FCA consultation – which closed on 15 January – have been considered.