"Double Dipping” and High Margins: FCA Challenges Fair Value in Premium Finance
The FCA has published its latest update to the Premium Finance Market Study which launched in October 2024. Although everyone is talking about Premium Finance these days, it isn’t a new hot topic. The FCA has issued a number of warnings before in the sales disclosure, affordability assessment, collections, pricing and fair value spaces. We’ve been following this topic since the beginning and can say with some certainty that it is only a matter of time before the FCA decides that it has issued enough warnings and needs to take some action.
Despite the repeated warnings, publications, portfolio letters there has been notably lethargic response from many market participants in relation to premium finance and it’s easy to understand why when you look at the profit margins on these products (see cost vs value below).
Many in the industry acknowledge that the premium finance model is far from optimal but agree that it serves a necessary function, particularly for those that need it to spread the cost of essential or legally required insurances. However, there is growing recognition that it can and should be improved. Although some firms have valued the flexibility and autonomy in how they structure these offerings, an increasing number are now calling for clearer regulatory direction. However, those hoping for definitive guidance particularly around what constitutes acceptable APR levels may find themselves disappointed. The FCA announced this week in its Market Study update that it will not pursue some of the anticipated remedies, such as market wide price cap on APR’s or a ban on certain commission models.
What has the FCA found?
In its studies the FCA found that:
Circa 60% of consumers pay headline APRs of between 20 and 30%
Almost 60% of consumers pay over 30%
Unsurprisingly, the cost is more expensive for motor insurance when compared to home, and more consumers (particularly those that are vulnerable or in financial difficulty) are likely to pay for their motor policies via premium finance compared to their home insurance.
Barriers to informed credit choices
While firms have become better at making the cost of paying monthly versus annually clearer, the FCA has found that consumers that want to pay through other credit options are likely to encounter barriers when trying to compare different credit products. This is because consumers often find it difficult to distinguish between the different components of credit pricing such as the total cost of credit, the interest rate, and the APR which can make meaningful comparisons between credit options challenging.
Double-dipping
The FCA is scrutinising the practise of firms using the customer’s decision to pay monthly to increase the price of their premium without making it clear and transparent they are doing this. This practice is commonly referred to as “double dipping”. While the FCA has ruled out industry wide remedial actions, it has warned firms using these practices without an objective and reasonable basis for doing so may be subject to enhanced scrutiny and that it will consider “supervisory approach on a firm-by-firm basis”.
Costs vs. profit
The provision of Premium Finance inevitably comes with costs, however, for many firms it’s also a high-margin opportunity - particularly where you have other loss-making books.
While providers do face expenses like staffing, IT, and funding, and some risk of bad debt (limited given that insurance policies are often cancelled after payments are missed), the reality is that revenues often far outstrip these costs. In fact, some firms are seeing profit margins of up to 62% - a stark contrast to the slimmer returns on core insurance products!
Even with bad debt levels well below those of typical credit products, especially for specialist lenders, the premium finance model is proving highly lucrative. This sustained profitability may help explain the industry’s sluggish response to regulatory concerns, as the financial incentive to maintain the status quo remains high.
But with great margins comes great responsibility especially when vulnerable customers are footing the bill.
What is the FCA proposing?
The FCA has said it will take a closer look at higher-products and the values they provide (if you are a firm offering APRs above 20% - you may want to take heed of the warning);
A review of the 0% APR model – and whether these are in fact offering fair value to customers, especially if credit risk is being used to offer 0% APR but a higher, less transparent policy premium price;
Investigate the effect of specific market features such as commission and clawback arrangements; and finally
Investigate the extent to which consumers can effectively compare premium finance with other credit products.
What can you be doing in readiness?
Ensure any premium differences between monthly and annual payers are objectively justified.
Disclose APRs and total costs clearly and upfront.
Consider how you can help customers compare premium finance with other credit options.
Ensure you have in place a framework to support customers who may be vulnerable or have low financial resilience.
Critically assess and challenge yourselves whether your margins on premium finance are consistent with the principles of fair value.
Assess your current commission and clawback arrangements.
The FCA’s warning on premium finance first dates back to 2015. While broader reforms may be slowed by political pressures, the regulator’s stance is clear: firms abusing its trust won’t face industry-wide leniency they’ll face targeted enforcement as per the FCA’s new supervisory approach. The message? Sluggish responses won’t go unnoticed. Now is the time to act, scrutinise your practices, understand your risks, and get ahead of the regulator before they come knocking.
The feedback window for this MS 24.2.2 closes on 30 September 2025. Whether you support or challenge the regulator’s position, now is the time to make your voice heard.