The City regulator has begun a review of the lending schemes that millions of people use to pay their motor and home insurance in installments.
The Financial Conduct Authority announced on Wednesday that they would be scrutinising the premium finance industry because of their concern that consumers were being taken advantage of. The Financial Conduct Authority announced the inquiry on the same day the government announced it would set up a separate taskforce for the industry to combat the “spiraling” cost of motor insurance, causing shares of the largest sellers of car cover to fall. Direct Line and Admiral both make money through premium finance. They closed at 176 1/2p (down 6p or 3.2%) and £27.14 (down 62p or 2.2%) respectively.
Since early 2022 the cost of car insurance has risen, causing concern among consumer groups and politicians that some households are unable to afford this essential service. Campaigners have also criticised the cost of premium financing, which allows customers to pay insurance in installments rather than a lump-sum upfront.
According to the regulator, more than 20 millions people are estimated to use premium financing. According to the regulator many of these customers face financial hardship and high fees to access this type of credit. According to a study by the FCA, 79 percent of adults who were in financial difficulty had used premium financing.
The FCA expressed concern that premium financing may not provide a fair value, given the range of rates from 20% to 30%. The FCA will provide a report on its findings, and what actions it intends to take in the first half next year.
Which?, a consumer group, welcomed the regulator’s review of premium finance. The group said that the inquiry must “lead to action” in order to end this unfair ‘tax on poorness’ for motorists. The group welcomed the new government insurance taskforce and warned that the price of car cover has reached “eye-watering” levels.
According to data collected by the Association of British Insurers, the average premium for motor insurance was £622 during the three-month period ending June. This is up 21% compared to a year ago and not too far from the record £635 set in the first quarter.
The cost of handling motor insurance claims has increased. This is due to the increasing cost of used cars and spares, higher wages at repair shops, and supply-chain bottlenecks which have made it more difficult to fix vehicles. The industry has been accused of profiteering. However, insurers have denied these claims.
Labour had promised to tackle the rising cost of car insurance in its manifesto, and the government has said that its new taskforce is part of its pledge. This initiative will involve Which?, Citizens Advice, Citizens Advice, and the FCA. They will also agree on measures to keep insurance costs down.
Louise Haigh said, “Car insurance is not a luxury, it’s an essential.” This is essential for accessing economic opportunities, and the government is determined to bring costs under control. We’re taking action by bringing insurance companies and regulators together to discuss ways to curb spiraling costs.
Close Brothers has been dealt a new blow by the FCA’s review of premium finance. The merchant bank suffered a halving in its share price after the regulator launched a separate investigation into car loans. Close Brothers is heavily exposed to both premium and motor finance. At the end of July its loan book was worth £10 billion, while premium finance accounted for PS1 billion. Close Brothers’ shares closed at 384p, down 4 1/2p or 1.2 percent.
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