Making clear the cost of Insurance premium finance provision to our customers For the first time, FCA has created rules that can impact the remuneration earned by insurance premium finance brokers. The new rules come into effect on 1 January 2022. FCA Rules PS21.05 were already in action since October 2021. Now lets us discuss the limitations for broker income. Limitations on financing remuneration ICOBS 6A.5.5 R states that a firm must not arrange any retail finance where this would not be in the customer’s best interests. Brokers may need to ask themselves the following questions. 1. Is the interest rate in the customer’s best interests? 2. Is there a conflict of interests resulting from the commission earned? 3. How does the arrangement selected provide a fair outcome for the customer? 4. Why was the financing arrangement selected for the customer?
Broker A earns a 15% commission from offering premium funding to its customers through a company. The insurer’s installment facility provides 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. The broker receives all its commission in advance from an insurance premium finance provider. It will be 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 amount to hit a target and retain the commission and the best interests of its customers.
Pre-contract disclosures ICOBS 6A.5 R makes it clear that customers must receive information about: 1. The total cost of the policy without financing; 2. The total cost of the policy with financing; 3. The cost of the premium funds 2. MINUS 1.; 4. Notification that the use of premium finance will be more expensive than paying for the policy upfront; Is there any difference between the duration of the policy and that of the premium finance?
Fair value 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 unless the firm has an objective and reasonable basis for making the change. ENBP and insurance premium finance When ensuring the price at renewal is no higher than ENBP, the relevant measure is the annual percentage rate if the premium investment is a regulated credit agreement or the total price paid by the consumer if it is not.
Reporting The Supervision Sourcebook (SUP 16.28.13 R) contains the new rules relating to premium funds reporting. Firms will be looking forward to reporting on form REP021: 1. Total charged for premium finance on policies written in the reporting period. 2. The total number of policies with premium finance written in the reporting period. 3. The total number of policies written in reporting period falls into bands of Annual Percentage rates from 0% to 50% or more. Non-retail finance All insurance premium finance offered to non-retail customers like firms of three or more partners or limited companies does not fall within the new FCA rules.