Brokers face ‘fair value’ dilemma on premium finance amid interest rate rises

For brokers dealing in premium finance, life doesn’t get any easier. In the past year, they’ve been navigating FCA scrutiny that has escalated premium finance compliance requirements.

A tricky process for brokers still taking an annual percentage rate of more than 30% – a threshold that many view as the limit of what they should be charging.

This regulatory scrutiny is compounded by rising interest rates coming from the Bank of England, which premium finance lenders passed on to brokers in both personal and commercial lines.

Fair value questions

Under Consumer Duty rules, which the FCA expects all brokers to have implemented by July, customers must be offered ‘fair value’ products. Does passing on the cost constitute fair value?

Prosura founder Jon Newell said the wholesale rate from his premium finance provider has just gone up from 3.95% to 4.25%. Newell runs a broker dealing with SME, based in Ossett, Yorkshire. 

We like to keep our [rates] at 9.95%. We’re hoping there’s only one more rate rise left this year before they start dropping.

Jon Newell

He said: “We’re swallowing it because people are having a tough time as well with bills. We’re not destitute. We’ve still got a margin on top, it’s just eating into our margin.

“There has to be a balance. Some of the rates I’ve seen from other brokers – they are just whacking it on. They’re eye-watering.

“Some brokers are putting 8% or 9% on top. We work on quite a thin margin.

“We like to keep our [rates] at 9.95%. We’re hoping there’s only one more rate rise left this year before they start dropping. Fingers crossed.”

Ketan Patel, managing director at Artemis Insurance Brokers, believes that brokers have to pass on the costs to their customers.

“You would have to pass it on because you have got a cost as well. You have got the cost of managing it.

“There is a cost with compliance and everything else, and you’ve got to spend a bit of time making sure the customer understands what they are doing. A lot of people do not read the print,” he said.

“When they default, we have got to deal with all the back-office work.”

Guidance from the premium finance houses

Brokers are turning to their premium finance providers for advice.

Mark Coffey, head of personal lines and e-trade at Premium Credit, said the lender is active in guiding brokers and listening to their concerns, but “ultimately, it is the responsibility of the partner to decide what they do”.

We have seen a lot of brokers that are absorbing that [fair value assessment] cost themselves. They are taking a hit on their own commission rather than passing it on.

Mark Coffey

He added: “A lot of brokers now are looking at their fair value assessments to determine [if it] is something they should pass on or absorb themselves. We’ll have conversations to see what they want to do, and I think the pleasing thing is we have seen a lot of brokers that are absorbing that cost themselves. They are taking a hit on their own commission rather than passing it on.”

Competition

The more problematic issue arises when brokers are offered a lower interest rate by the insurer compared with the premium finance house.

Although insurers do not blanket offer premium financing across all products, they do it fairly regularly on a case-by-case basis.

The key question arises as to whether a broker is offering fair value to a customer if they can source a more competitive deal elsewhere. Patel said he makes it clear to his staff that they should offer the insurer rate if it is better for the customer.

Their [insurer] rates are usually better than the finance houses, but they are doing their credit checks as well. That’s treating customers fairly.

Ketan Patel

He continued: “Why would you do it through a finance house to earn another point or two? When you pass it on to the insurers, let them deal with the problem on the financing.

“Their rates are usually better than the finance houses, but they are doing their credit checks as well. That’s treating customers fairly. I say that to the team here: ‘If the client wants it, let them go down that route’.”

Peter Blanc, CEO for Aston Lark, which often deals with larger cases, said on those bigger ticket cases, the premium finance house proposition works well because they can cover a broad suite of products, which is often what the clients wants.

However, if there is the opportunity to offer the insurer rate, and the client is happy, then that is a best way forward.

Newell agrees that this is the right approach, adding: “You have to. A lot of brokers don’t. But you’re supposed to be doing that.”

Commission

The incentive for brokers to offer the rate given by the premium finance house, rather than the insurer, is that they can make money through commission.

However, Coffey said that Premium Credit will intervene if the commission charged is ‘excessive’.

He stated: “We will look at fair value assessments if we think that somebody is being excessive in the charges, but ultimately, that is down to the partner. We’ve been really, really, vocal about what we’ve done around Consumer Duty.”

Bexhill founder Ravi Takhar believes brokers are caught in the jaws of two conflicting issues. On the one hand, they should offer the insurer financing if it is at a lower rate. 

However, the commission they earn from premium financing is important in helping them make profits, especially in these challenging economic times.

Takhar said: “If they use the insurance facility, they don’t get paid any commission. You should use the insurer, but what is the commercial sense for you to do that?

“You’ve got to pay your staff, you’ve got to pay office rent, your gas and electricity have gone up. How are you supposed to do that if you just conduct business like this without making income? Fair value is great for the consumer, but is it actually fair to the broker?

“Because the broker is running a business and the broker needs to operate his business at a profit, otherwise they have to close.”

Options

Takhar says that his finance house can set brokers up with their own premium financing lending facility, which is another option. When everything is taken together, the FCA is harming entrepreneurship, he noted.

What the FCA is doing is disincentivising people from even starting a business. I think that’s a real issue we’re facing in the UK market.

Ravi Takhar

The combination of the delays in approvals, and the onslaught of regulation, is making it hard to start-up and innovate.

“The FCA is actually making it difficult for entrepreneurship to survive. If you make an application to the FCA to start an insurance business or a consumer credit business, it can take more than 12 months for you to get approved.

“If you just want to change your business, if you’re an insurance broker and you just want to add the credit permission to your licence, it could easily take three to six months to get that approved.

“What the FCA is doing is disincentivising people from even starting a business. I think that’s a real issue we’re facing in the UK market.”

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