Brokers and premium finance providers tell Insurance Times the proposed changes to FCA affordability tests are “overkill”

Brokers are furious that new affordability tests could disrupt customer’s access to premium finance and drive them into the hands of loan sharks.

The FCA is set to introduce the tests, which would make it compulsory for policy applicants to declare their income before purchasing a policy via premium finance – when a person receives a loan to pay off their insurance, with interest attached.

The income data is sent to the premium finance provider, who then comes back to the broker saying whether it can take on the risk or not.

Brokers have spoken to Insurance Times about their anger at the proposal, saying it could push vulnerable people into the arms of loan sharks or even mean they choose to be underinsured or completely uninsured. 

“It’s overkill from the FCA,” said Mark Bower-Dyke, chairman of Be Wiser Insurance. 

“The problem is that they’ve not thought through these changes and it’s going to have a detrimental impact for the most vulnerable customers,” he said.

“Motor insurance is compulsory and by potentially denying those less well off access to premium finance the FCA will push people into alternative forms of financing.

“This might be loan sharks, or they might turn to short-term policies, which will end up costing them much more over the course of a year.

“It could mean more people choose to remain uninsured.”

FCA on affordability tests

“It is important that firms ensure that they conduct adequate assessments of creditworthiness, including affordability, before credit is granted or a credit limit is increased. 

“The assessment must be based on sufficient information, obtained from the customer where appropriate, and a credit reference agency where necessary.

“We would expect lenders in all sectors to consider whether a customer can afford to repay the credit without adversely affecting their financial circumstances.

“We expect affordability checks to be reasonable and proportionate to the lending undertaken.”

Premium finance providers back brokers

And premium finance providers have backed the position of brokers.

Tom Woolgrove, chief executive of Premium Credit, said his firm has been working with the FCA to ensure the checks are proportionate. And he said a full income disclosure was rarely necessary.

“We do not believe that full income and expenditure is proportionate for most insurance premium financing, given the relatively low average premiums, and would clearly be disruptive for brokers and customers journeys,” he said.

“Instead, for our affordability assessments, we are using a range of public information, such as bankruptcy and IVA’s (Individual Voluntary Arrangement), credit reference data and internal performance data.”

Premium finance can benefit customers by spreading the cost of annual premiums. Woolgrove said that, while he understood the regulator’s concerns about overall levels of consumer indebtedness, the FCA should also take into account the detrimental impact of reducing access to premium finance for vulnerable applicants.

”We’ve been calling on the FCA to clarify its policy objectives in relation to the perceived risks and/or additional customer protection from revising affordability assessments, against reducing access to premium finance and the heightened risks of driving customers to other forms of credit or avoiding insurance entirely,” he said.

“We think all participants, including insurance brokers, would benefit from that clarity.”

FCA engagement

Woolgrove said Premium Credit has been encouraging its brokers to engage with the FCA to make it aware of the potential impacts on customers.

This is something Sharon Bishop, chief executive of premium finance at Close Brothers, said it had also been doing.

Bishop said: “Regulatory change is a constant factor in our industry and we need to continuously adapt to evolving requirements.  

“That’s why it’s so important that we work together with our brokers, and the regulator, to implement any changes in the best possible way.  

“Ultimately we all want to achieve the same thing, which is the best possible outcomes for our customers.”

The premium finance customer journey

  • The broker completes a review of the customer and their insurance needs before finding insurance policies that meet these requirements. How the customer intends to pay for the insurance policy is often discussed at this point.
  • The broker presents the insurance options to the customer, including payment options. Research shows customers want to be offered premium finance each time - irrespective of their payment choice in previous years. The benefits and costs of spreading the payments are explained.
  • When customers choose premium finance, the broker submits an application to the premium finance provider, which includes relevant customer information.
  • The provider then assesses the application, including a review of creditworthiness and the assessment of affordability, before agreeing to provide credit and confirming the same to the broker.

 

 

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