Which? calls on FCA to act to protect consumers as APRs up to 40% for monthly car insurance payments

Which? has called on the FCA to take action to protect consumers after it revealed those paying monthly for car insurance are being charged annual percentage rates (APRs) of up to 40%.

Which? asked 39 car insurers what APRs they applied to monthly payments and, where there was more than one rate, what caused the difference. The results found some insurers applied APRs as high as 39.11%, whilst the average rate was 23.37% across 27 providers. Ten insurers chose not to disclose their rates.

The highest rate applied was 1^st Central, which charges between 5% and 39.11% and issues customers with a personal interest rate following a credit risk assessment. Only two companies, NFU Mutual and Hiscox, reported not charging interest on monthly payments.

The findings follow a significant rise in insurance premiums, with Which? reporting in March that car insurance premiums had increased by almost 50% for young drivers in the past year. Whilst rising costs are preventing customers from being able to afford premiums upfront, they now face up to 30% APR on monthly payments.

In response to the report by Which?, one insurer, Markerstudy, defended its practices and stated that it regularly assesses its rates to ensure fair value, whilst Axa argued that using representative APRs for comparison could be misleading due to different calculation methods.

Rocio Concha, Director of Policy and Advocacy at Which? stated “those who can’t afford to pay for their premiums upfront are being penalised with eyewatering rates of interest” and called for “the FCA to step up and get tough with firms that take advantage of customers who can least afford it”.

Which? noted that high interest rates insurers charge customers paying for cover monthly resemble those appropriate to credit card lending. As insurers assume a significantly lower risk than that of credit card lenders, as the policy can be cancelled in the event a customer defaults on a monthly payment, the rates do not appear justifiable in relation to risk.

The findings echo previous research by Which? which found monthly instalments could add hundreds to insurance costs. In September 2023, Which? reported that the average annual premium paid by GoCompare users was £583, compared with monthly payers who paid £892 across the year, and in November 2023, the consumer advocates revealed an 18-year-old driver from Warwick, whose annual premiums started at £3,000, would pay on average £459 more for opting to pay monthly.

Subsequently, Which? has called on the FCA to devise an action plan to ensure that the interest rates charged by firms provide fair value, suggesting that the regulator creates a league table which ranks providers.

Premium finance has been criticised previously, with Matt Brewis, Head of Insurance at the FCA branding it “a tax on the poor”, adding “those who pay monthly are subsidising those who can afford to pay annually”. In 2022, the FCA’s Dear CEO letter warned premium finance could cause struggling consumers to cancel cover or chose based on price rather than need.

Indeed, the recently published January 2024 FCA Financial Lives Cost of Living survey revealed one in five adults cancelled an insurance or protection policy (6% or 3.2m) reduced their level of cover (6% or 3.1m), and/or chose not to buy a policy (12% or 6.4m) in the 12 months to January 2024, to save money or because they could not afford the premiums.

Due to the combination of the rise in insurance premiums and the cost of living, there is likely to be a greater number of insurance distributors offering premiums finance to a wide number of customers, and a higher incidence of customers who are in financial difficulty or displaying signs of vulnerability.

Therefore, it is important that firms with higher APRs review their rates to ensure that they offer fair value in accordance with the Consumer Duty, that outcomes are monitored and assessed on an ongoing basis, and that firms have robust systems and processes to treat customers who are in financial difficulty, or who may be vulnerable, fairly. For more information, see FG21/1: Guidance for firms on the fair treatment of vulnerable customers (fca.org.uk)

Considering the FCA’s recent review into firms’ treatment of customers in vulnerable circumstances, and the growing scrutiny over the fair value of multiple motor and finance products, firms should be cognisant that the regulator may increase supervision in this area and could seek to extend their perimeter to cover a greater number and variety of premium finance products and services.

For additional help and guidance, feel free to get in touch with the UKGI team at: www.ukgicompliance.co.uk, or 01925 767888

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