Tom Woolgrove interview: New affordability tests hitting profits at Premium Credit

New stricter rules on affordability tests have dented the profits of Premium Credit.

Chief executive Tom Woolgrove confirmed to Insurance Times that the premium finance provider has since January been working to the FCA proposals and that the result had been fewer customers.

The bottom line has also been impacted by greater costs associated with the proposals, but Woolgrove said the decline in profit had been “marginal”.

“The changes are having an impact on our overall levels of income,” Woolgrove said. “Not a large part, but our income is lower as a result.

“We’re not accepting as many customers and it’s also had a costs impact because we are now assessing more customers for affordability and that means more data we buy from the credit reference agencies.

“And while our costs have gone up, for us it doesn’t have a benefit in terms of the credit losses because typically we would use the cancellation of the insurance to repay our loan, so actually we didn’t see many credit losses.

“It has had a negative impact. It’s a marginal impact, but it is negative rather than positive.”

Broker criticism

Brokers have criticised the proposed FCA changes as making it harder for customers to access premium finance for mandatory insurance products like car insurance.

They say the stringent checks can push people into borrowing from loan sharks or choosing to remain uninsured.

But since the FCA consultation last year announcing the plans for more rigorous affordability tests, Woolgrove revealed Premium Credit had spent millions of pounds upgrading its technology and changing its systems to embed the new proposed checks.

He said that brokers had criticised the firm for introducing the changes before the final consultation document is published, but Woolgrove explained the decision.

Woolgrove said: “What we’ve always thought is we want to be ahead of the curve and minimising the disruption for brokers.

“So we took a decision that as the FCA were very clear in their guidance for how the regulations were going to change, we might as well move to this new place rather than just sit where we are.

“Now I don’t expect there to be very significant changes for us as a result of the new consultation.

“We received some criticism from brokers that we were ahead of the regulatory curve, but we’ve now embedded all of those changes with brokers who have been working with our regime for the last six months.

“Brokers are now very happy that we are delivering to the new standards because we’re now through those changes.

“Some of the outcry is because some brokers are now realising that there are changes coming, but all of the brokers that we serve have already been through that.

“I don’t think there’ll now be a lot of change for our brokers going forward, unless the FCA materially changes its view, which it has given no indication of doing.”

Fewer defaults

And Woolgrove revealed that while adopting the more stringent checks had hit profits, it had also resulted in fewer customers defaulting on their premium finance loan.

Prior to introducing the changes, around 2-3% of the firm’s 2.2m customers defaulted. Since the changes this has fallen slightly.

But Woolgrove said he had highlighted to the FCA that the initial small number of defaults indicated that further changes to affordability tests were not required.

Woolgrove added: “The changes have made a few points of percentages improvement, but it’s not like we’ve gone from 30% to 20%.

“We’re saying it’s gone from a handful of percentage points to a slightly smaller handful of percentage points.

“But it’s really quite a marginal effect. The FCA would say ‘yes but we’re worried about rising interest rates, we’re worried about consumers having too much debt and we’re genuinely worried about customers overreaching themselves.’

“Of course they want to make sure firms are lending in a sustainable way. My response consistently has been ‘but we do’.

“That’s in our business model to make sure we do that. These changes need to be proportionate and they need to make sure that customers can continue to afford insurance.

“Premium finance is a way in which they do that. It’s been a really consistent theme that we’ve had for the last year with the FCA to not make this too onerous.”

Natural competition

The default rate compares favourably against other forms of more expensive credit, such as credit cards and bank loans.

Woolgrove said these alternative forms of finance serve as natural competition that keep the rates offered through premium finance affordable.

The new changes look at overall indebtedness, with the FCA keen to ensure customers do not default on any of their loans.

And Woolgrove said there was a balance to ensure the right customers were gaining premium finance who could afford it.

He added: “The benefit of a premium finance product over other forms of finance is if you do default there isn’t any outstanding balance and so your credit profile isn’t impacted as much as if you’d defaulted on a credit card.

“That’s why we’ve been arguing with the FCA to make sure that the affordability assessments are very proportionate to the actual risk and that they don’t treat premium finance in the same way as they treat other forms of consumer credit.”