The FCA published earlier this week its thematic review report on the provision of premium finance to retail general insurance customers. This issue lies at the intersection of established and new regulatory regimes (insurance and consumer credit (as I have previously explained)); both of which are under renewed and intense scrutiny.
Focussing its review on the online purchase of private motor and household insurance products (which, according to the report, was estimated to account for 53.1% and 46.7% of UK private motor and combined household insurance sales respectively in 2014), the FCA's findings reveal shortcomings in the information provided by both those who arrange and provide premium finance to retail customers.
The report highlights the following key findings based on a desk-based review, up to the point of inputting payment, of the websites of 13 general insurers and 30 general insurance intermediaries (including four price comparison websites) between October 2014 and January 2015:
1. There is a lack of clear and appropriate information on payment options and the different costs associated with these choices
(a) Premium disclosure and finance options
Insurers and intermediaries are required in the initial stage of the customer's online purchase journey to provide sufficient, clear and consistent information on the overall cost of the insurance product and how this is affected if a customer chooses to pay for it in instalments. In 43% of cases, this was not the position.
(b) Information provided via a representative example
Where firms are providing premium finance under a regulated credit agreement or credit broking and where the financial promotion includes a rate of interest or an amount relating to the cost of the credit, it is a FCA requirement that customers are provided with a representative example. The information required in the representative example must be of equal prominence, and more prominent than other cost information. It must also be more prominent than any indication or incentive triggering the representative APR.
The FCA found in the majority of cases either a representative example was not provided, or this did not include all the required information or it was not in the appropriate format. Furthermore, in 47% of cases, certain information was given undue prominence.
(c) Annual Percentage Rate charged
The FCA identified a wide range of APRs charged. In 50% of cases, the APR ranged from 26 to 40%. In a small number of cases, no APR was shown. The FCA notes that it is important that customers have appropriate information to compare pricing and understand the impact that the cost of finance has upon the overall cost.
Good practice involves:
- Clearly show the total cost of paying for insurance by instalments against the cost of a single upfront payment.
- Information required in a representative example contained in a financial promotion must be given equal prominence and greater prominence than any other information relating to the cost of the credit in the financial promotion.
- A representative APR should be given greater prominence than any indication or incentive triggering the representative APR.
2. There is a lack of appropriate information about the instalment option being offered
The lender or a credit broker acting on its behalf is obliged to provide a customer with a pre-contract information form (the SECCI) and also an adequate explanation of the proposed agreement (including the key risks and the principal consequences of non-payment). The FCA notes that: (i) an adequate explanation was provided in only 34% of cases and was contained in a separate link in the majority of cases; and (ii) the SECCI was not provided in 81% of cases.
Good practice involves:
- Pre-contract information and explanations should be provided early in the customer's purchase journey in order to ensure customers are treated fairly and their information needs are met to enable customers to make informed decisions about the options being presented.
3. There is a lack of consumer understanding about the services being provided
Where firms are acting as credit brokers, the FCA expects firms to detail: (i) the identity of the lender (where known); (ii) the nature of the service that the firm provides; (iii) the basis of the firm's relationship with the lender (including whether it works exclusively with one or more lenders or works independently); (iv) the existence of any commission or remuneration arrangements between the firm and the lender that might affect the firm's impartiality in recommending a credit product or might have a material impact on the customer's transactional decision; and (v) the fee, if any, payable by a customer to the firm for its credit broking services.
(a) Activity disclosure and relationships between parties
The FCA found that, in the majority of cases, the capacity in which the credit broker was operating and its relationship with the lender was unclear and the details of the lender was not always clearly presented prior to the first payment screen.
In addition, in over 75% of cases, the FCA notes that it seems likely that firms were not operating as independent credit brokers and had an exclusive arrangement with a lender which should be disclosed to the customer.
(b) Financial arrangements between parties
Generally, firms acting as credit brokers did not provide, prior to the first payment screen, the existence of any financial remuneration paid by the lender. The report notes that 83% of firms used third party finance providers and may be remunerated by the finance provider through a commission or other arrangement which the FCA would expect to be made clear to the customer.
(c) Fee disclosure
The FCA describes the overall quality of the disclosure where credit broking fees (ie fees payable by the customer to access the credit facility) were charged was poor. In some cases, disclosure was provided in separate terms and conditions and in other cases, the fee was not included in the representative example.
Good practice involves:
- Ensuring that the customer receives sufficiently clear information that enables them to understand the basis on which a broker is acting for them in relation to each product they purchase and how the broker is being remunerated for this.
4. More to come
The FCA has indicated that it will be taking a range of actions to address potential risks to customers which will include supervisory engagement with firms to ensure that they address specific issues identified during the review, requesting further information and taking appropriate action with individual firms where there is an indication of specific potential failing or poor practice and engaging with the wider industry, including trade bodies, and consumer bodies to provide feedback on its findings and expectations.
In light of this, insurers and insurance intermediaries should consider now the content of this report, review their customer purchase journeys in relation to providing or arranging premium finance for their general insurance consumer customers both in respect of online sales and other sales channels to ensure they comply with the FCA's expectations.