This is the first time the FCA has created rules which could impact on the levels of premium finance remuneration earned by insurance brokers. The new rules come into effect on 1 January 2022.
Limitations on premium finance remuneration
ICOBS 6A.5.5 R states that a firm must not arrange any retail premium finance where this would not be in the customer’s best interests.
Brokers may need to ask themselves the following questions.
1. Is the premium finance rate in the customer’s best interests?
2. Is there a conflict of interests resulting from the commission earned on the premium finance and the best interests of the customer?
3. How does the premium finance arrangement selected provide a fair outcome for the customer?
4. Why was the premium finance arrangement selected for the customer?
Broker A earns 15% commission from offering premium finance to its customers through a premium finance provider. The insurer’s instalment facility offers an Annual Percentage Rate (APR) of 10%. On the face of it, Broker A may not be acting in the best interests of its customers and may wish to consider reducing its commission.
Broker receives all its commission in advance from a premium finance provider either as a direct payment or in the form of marketing or training allowances. A potential conflict of interests may exist between the broker offering premium finance to hit a target and so retain the commission and the best interests of its customers.
ICOBS 6A.5 R makes it clear that customers must receive information about:
1. The total cost of the policy without premium finance;
2. The total cost of the policy with premium finance;
3. The cost of the premium finance ie 2. MINUS 1.;
4. Notification that the use of premium finance will be more expensive than paying for the policy upfront;
Any difference between the duration of the policy and that of the premium finance.
Firms would be breaking the fair value requirements were they to increase the price of insurance products because the customer is purchasing the policy using retail premium finance, unless the firm has an objective and reasonable basis for making the change.
ENBP and premium finance
When ensuring the price of the premium finance at renewal is no higher than ENBP, the relevant measure is the APR if the premium finance is a regulated credit agreement or, the total price paid by the consumer if it is not.
The Supervision Sourcebook (SUP 16.28.13 R) contains the new rules relating to premium finance reporting. Firms will be expected to report (on form REP021):
1. Total charged for retail premium finance on policies written in reporting period.
2. Total number of policies with retail premium finance written in reporting period.
3. Total number of policies written in reporting period falling into bands of APR rates from 0% to 50% or more.
Non-retail premium finance
All premium finance offered to non-retail customers ie firms of three or more partners or limited companies does not fall within the new FCA premium finance rules.
Bexhill UK Ltd