FCA fails to act on premium finance insurance rip-off

About half of customers buying car and home insurance pay monthly, with 23 million doing so in 2023. But Which? believes many are potentially being ripped off. 

Yesterday, the Financial Conduct Authority (FCA) published a report concluding its ‘market study’ (begun in late 2024) investigating how insurance companies supply premium finance to customers.

While its report flags a number of problems potentially affecting millions of customers, the regulator has concluded that the market has changed for the better in recent years, and that drastic action isn’t required to ensure fair value for customers.

Here, we explain what premium finance is, where the problems are, and what we think of how the FCA has dealt with the issue.  

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How premium finance works

Buying car or home insurance is more than just a good idea — it’s often mandatory. Car insurance is a legal requirement of being on the road and home insurance is usually a contractual obligation when taking out a mortgage.

So if you can’t afford a year’s premium all at once, the option to pay monthly is therefore vital. ‘Premium finance’ is the arrangement most customers use to do this.

Premium finance is simply the name for a credit arrangement whereby you technically borrow your year’s premium in advance, and repay the ‘loan’ month by month. Often (though not always) you’ll pay interest for the privilege —  meaning that across the year you’ll pay extra for your insurance.

While setting up a monthly payment plan happens in seconds, behind the scenes, it can involve complex arrangements between insurers, brokers and lenders.

• Find out more: best car insurance

The problem with premium finance

While premium finance is a necessity, its fairness and value for money have been in question over the last few years, with Which? actively campaigning for a better deal for monthly payers since early 2024. 

Our surveys of the market have repeatedly found wide variation in what different insurance firms charge customers to pay monthly, from nothing at all to eye-watering interest rates of over 30% APR (Annual Percentage Rate).

In a report last year, industry regulator the FCA indicated that providing premium finance can be a lucrative money-spinner that penalises customers who can least afford it. It wrote that revenues earned through providing premium finance ‘materially exceed cost for some providers’. And it was famously described as a ‘tax on being poor’ by the FCA’s former Director of Insurance Matt Brewis in 2024. On Tuesday, it published its final report concluding its investigation of the market.

• Find out more: End the Insurance Rip-Off  - follow our campaign

What the FCA's report found

In Tuesday's report, the FCA again pointed out a number of issues and examples of ‘poor practice’ when it came to how premium finance is provided. 

It pointed at insurance brokers working with specialist premium finance lenders have some of the highest charges compared to the actual costs they incur in providing customers with premium finance.  

It also scorned some companies for not doing enough to assess if they were offering fair value to their customers, checking how competitive their rates are, or identifying customers that might be financially vulnerable. 

However, it's also concluded that there's no need for market-wide changes, arguing that most firms have dropped their rates between 2022 and 2026, resulting in savings of £157m per year for monthly-paying customers. It also claims to have engaged with 10 firms charging high prices and fees, with four consequently reducing their APRs from 38% to 31%.

'We're not planning any market-wide changes'

Graeme Reynolds, director of competition and interim director of insurance at the FCA, commented:' For millions, paying for insurance monthly is not a choice: it’s a necessity. We found that competition in the market is meeting the needs of many consumers. But where we found issues, we used our Consumer Duty to get people fairer value, without needing to write new rules.

'While we’re not planning any market-wide changes, we won't hesitate to act if firms fall short of our expectations as we continue to monitor fair value.'

What Which? says

While we've seen some firms lower their rates and applauded them for doing so, we're not convinced by the FCA's apparent conclusion that the underlying problem of unreasonable rates has largely solved itself — especially with its own analysis suggesting tens of millions of customers depend on it.

Rocio Concha, Which? Director of Policy and Advocacy, said: 'For too long, car and home insurance customers who can’t afford to pay for cover all in one go have been stung by excessive rates of interest that have seen their overall cost soar. They have been let down by this weak response from the FCA. 

'Despite it being two-and-a-half years since the introduction of the Consumer Duty, and previously calling premium finance "a tax on being poor", the regulator has decided just to warn a few bad apples, rather than fundamentally tackling the issue.

'The regulator must hold the sector to account to ensure the motor and home insurance markets work more fairly for customers who cannot afford to pay for their premiums all in one go.'