Brokers warned on premium finance amid latest FCA action on car commissions

The move could put some brokers out of business due to the way they make a profit.
 
Brokers have been warned they face major change in the way they receive payment for premium financing amid an FCA crackdown on car finance.
 
Bexhill co-founder and chief executive Ravi Takhar says the read across from the car financing crackdown into premium financing is inevitable, and brokers must prepare for change.
 
Takhar is concerned following yesterday’s FCA crackdown on car finance commission after it uncovered unfair practices among some retailers and brokers.
 
It is to ban add-on commissions and therefore enforce a fixed commission fee instead, rather than the old way of linking it to the interest rate at which it is sold.
 
The FCA said some sellers were earning commission according to the interest rate at which they sold a car, with greater bonuses on offer for charging customers more - an unfair practice on customers buying vehicles.
 
There will be a consultation period on the proposals until January 15 next year, prior to implementing it at some point as well as the future disclosure of any commissions to brokers.
 
Takhar, at Bexhill UK, told Insurance Times: “The FCA is saying quite clearly that brokers adding commissions of an unreasonable nature to their net rates or their lenders should be banned.”
 
He fears a commission crackdown into premium financing could put many brokers out of business, as they rely heavily on premium financing revenue to cover the costs of doing lower margin or even loss- making parts of motor insurance trading.
 
Larger brokers with in-house premium fianance might fair better as they have the infrastructure and set-up to absorb the impact of regulatory action.
 
Fight for survival
Takhar explained that historically brokers are getting net rates in from lenders at 3-4% and some are then charging their customers over 20%.
 
There are a number of high profile, national insurance brokers who charge their customers over 20% on their premium finance.
 
Takhar said this has never been fair to customers, but until now no one has done anything about it.
 
All brokers have added-on commissions to the net rate provided by premium finance lenders, and to get business these lenders have provided very low rates to insurance brokers, some as low as 1% per year.
 
“The reason it is significant in the UK is that a lot of brokers rely on that commission income to survive,” he said.
 
This is because brokers don’t make any commission in the first year with new customers and therefore rely on things like premium finance commission.
 
Takhar warned that brokers need to start planning now in order to deal with this issue effectively in the future.
 
Since 2014 when the FCA published its first report on the issue, the problem has been largely ignored by the industry as back then it solely related to motor finance, he says.
 
But Takhar added that it was quite clear now that the FCA is now looking at the credit broking industry as a whole.
 
Full disclosure
The FCA said that any commission charged should be fully disclosed as it is unfair to consumers and could see no reason for it.
 
Takhar continued: “That’s going to cause a number of issues with personal lines brokers in the industry.
 
On top of this, premium credit lenders are all fighting to get the brokers’ business – they charge a net rate, brokers charge on top of this what they feel is appropriate.
 
Back in March 2019, the FCA reported on their dislike of “add-on” commissions, which is where a broker ’adds’ its commission to the lender’s rate, it subsequently stated that it was banning add-on commissions.
 
However this issue is not limited to insurance brokers, it includes credit brokers also.
 
Original article was posted on Insurance Times. You can read it here.

Should premium finance-earning brokers worry about the FCA?

The FCA’s latest actions following the release of its Motor Finance Commissions report could result in a loss of approximately £125m for brokers in the car dealership sector, according to the regulator’s predictions.

The proposed ban is likely to come into force mid-2020 and will see add-on car commissions for brokers stopped.

Ravi Takhar, chief executive and co-founder at Bexhill UK, previously revealed to Insurance Times, he is concerned about the inevitable oncoming read across into other areas of credit broking, such as premium finance.

“The FCA is saying quite clearly that brokers adding commissions of an unreasonable nature to their net rates or their lenders should be banned,” he warns.

So how concerned should insurance brokers be about the read across into their premium financing?

Owen Thomas, chief sales officer at Premium Credit, told Insurance Times that the firm is continuing to consider implications following publication of the FCA report.

“We believe our partners provide an important service for customers and we continue to work closely with them to ensure good customer outcomes,” he said.

Not just motor finance
EY partner Sajedah Karim explained that the FCA’s crackdown on car finance commissions will have a wider impact.

She warned: “The proposals may require business models to be reviewed and alternative commission structures or ways of replacing lost revenue to be considered, as well as systems to be enhanced, and contracts and staff remuneration arrangements to be renegotiated as the next steps.”

Any “additional proposals around commission disclosure, clarifying existing rules will impact brokers across the consumer credit market,” she added, stressing that it is “not just within the motor finance sector”.

No inherent problem
James Fairclough, chief executive at AA Cars, said that although the FCA has concluded “quite rightly that there us no inherent problem with car finance products themselves” however “customers are poorly served if they are not shown the options best suited to them”.

The key to solving the problem of credit lending - across all areas including premium finance - is better transparency.

“Transparency and clarity are essential for the car finance industry to serve customers properly, and the FCA’s proposal would make it easier for car buyers to compare different deals and shop around,” he said.

Fairclough believes that finance providers have done an excellent job of offering customers a wide and flexible range of products designed to make buying and running a car easier.

He said that too often customers are not presented with the full range of options, meaning that they may miss out on good deals or pay more than they should.

But Fairclough said that the FCA proposal “should improve consumer choice and transparency”. Although he admits: “Customers should still thoroughly research before selecting a deal."

 

Original article was posted on Insurance Times. You can read it here.

 

 

FCA ready to pounce on premium financing if it finds ‘harm’

Industry is worried the regulator is gearing up to attack premium finance, a vital source of revenue for brokers and insurers

The FCA has warned it is ready to intervene on premium financing - but only if it finds harm to the customer.

Amid its latest crackdown on credit lending, this time in car finance, the FCA said: “We are aware that DiC and similar commission models exist in other markets (for example, asset finance and premium finance).

”We do not currently have evidence to justify consulting on banning particular commission models in those consumer credit markets.

”However, if we identify evidence of harm in other markets, we will consider further interventions.”

 

Bexhill is warning brokers should act now on premium financing.

Bexhil co-founder Ravi Takhar said: ”The FCA is saying quite clearly that brokers adding commissions of an unreasonable nature to their net rates or their lenders should be banned.”

 

Original article was posted on Insurance Times. You can read it here.

Brokers facing further rising costs

A number of brokers have recently received notification from a lender in the premium finance market, that their rates are rising.  

The rate rises come following news of increasing costs and pressures on brokers from rising IPT, the impact of the Ogden rate cut and other crippling economic pressures.

The premium finance provider Bexhill UK, has confirmed it has no current plans to increase rates or fees. Ravi Takhar, Chief Executive Officer of Bexhill UK comments: “Brokers are being squeezed from every angle and news of these rate rises is bound to concern and anger some brokers, particularly when the reasons given for the rate rises are due to technology spend by the lender.  For brokers that have seen no evidence of these benefits, this rate rise is a bitter pill to swallow.”

An example rate rise of 0.35% on a Personal Lines book of £2m will now cost broker’s in-excess of £7k, which is a considerable amount. This cost has to be either absorbed or passed onto the customer on top of rising costs in premiums and IPT.

An Insurance Broker, who wants to remain anonymous, said: “Customers are already being faced with serious premium hikes so a hike in the finance rates when Bank Base Rate remains unchanged won’t go down well and is going to be a difficult message to deliver. What makes me angry though is the lack of credible justification given for the increase.  It is the finance company’s prerogative to increase rates, but I for one will be looking elsewhere in future for a better rate from a finance provider that can give me and my customers more certainty and control”. 

Embrace change and prosper - Ravi Takhar

Embrace change and prosper!

The FCA is taking a very dim view of car finance brokers adding a gross rate to a finance company’s net rate.  This is because the borrower could be getting a different rate from the same lender when it goes to two different car finance brokers.  With the FCA’s attention firmly on commission disclosure under the long-awaited Insurance Distribution Directive, it’s not a stretch to see how the same scenario would apply to insurance brokers.

Responses to the FCA’s consultation document on the Directive must be submitted by 6th June. Whilst mandatory commission disclosure is not currently being called for, a new rule will require parties “to act honestly, fairly and professionally in the best interests of their customers” and intermediaries will also have to explain the “nature and basis” of their remuneration.

Most brokers currently add a gross commission rate onto the premium finance company’s net rate as standard practice, and rates differ between brokers. Given the recent experience in the motor intermediary finance market, would the FCA deem this unfair for the consumer?  What might the changes be and if gross rate commissions are banned what impact will it have on brokers?  Given that it isn’t uncommon for 50% of brokers’ pre-tax profits to come from finance arrangements today, such a ban on commissions earned from premium finance arrangements alone could pose a serious threat to brokers’ income. 

The pressures on brokers are mounting – both from rising costs and increased regulation.  Rising IPT and FSCS levies, the Discount Rate, the threat to the broker market from Fintech and aggregators…it all eats away at brokers’ profitability, and there’s only so much that commissions can be tweaked to compensate.

If the FCA bans or restricts gross rate commissions on finance arrangements, brokers will need to claw back that income elsewhere; to look creatively at bespoke finance agreements and bringing the function in-house and cut out the middle man!  This might sound like a leap but bringing premium finance in-house will give brokers back control over how the finance is structured and give them a bigger slice of the pie

The FCA is quite rightly keen that brokers justify the commission they make on finance.  Providing their own premium finance facilities will mean brokers have access to all the MI and justification they need to charge appropriate fees and interest for providing their facility. Brokers can therefore protect their income from premium finance business.  This is just one way that additional income could be legitimately and transparently earned.

Bexhill believes in transparency and fair commission but the problem comes with those few brokers who take advantage of the system.  The FCA will quite rightly put a stop to eye watering over inflated commissions, but for the majority of brokers who will lose income from quite legitimate gross commissions charged, be reassured - there are other ways to earn that income – whether that’s through value added products or in better, smarter ways of working with ancillary services, including premium finance. 

The changes being introduced by the FCA on commissions are just one of the many challenges that brokers are facing today. We are entering a brave new world and brokers are having to adapt and evolve in so many ways to stay relevant, so embrace change and prosper.

Expert View - Ravi Takhar

Premium Finance Funding Offers An Opportunity

A question on the lips of a number of insurance brokers is whether they should self-fund their premium finance rather than rely on third-party providers.

We have been advising insurance brokers on premium finance self-funding since 2002 and with our support more than 100 UK insurance brokers now own and operate their own premium finance business. Some of the largest insurance brokers in the UK have been self-funding their clients for years.

In today’s market everybody seems to be lending: peer-to-peer lenders allow grandmothers in Bolton to lend to secretaries in London. The question is why aren’t more brokers lending to their clients?

We have proven data that shows that any insurance broker that sets up its own in-house premium finance company can become self-funding within one to five years. Self-funding means having all the cash required to finance all your clients without relying on a third-party funding provider.

There are several reasons why brokers might consider setting up an in-house premium finance facility.

First, the FCA is becoming increasingly focused and concerned about the commissions brokers are making from the add-on premium finance product.

Some brokers only make a modest commission, but we understand that even rates of 1% are being questioned by the FCA. But other brokers earn a far greater commission, which in many cases dwarf the net rate provided by third-party funders. These commissions are not sustainable. By contrast, a lending rate charged by a finance company is not a commission and therefore as long as it is below the High Cost Credit Rate (currently 100% APR), it is deemed to be more of an appropriate reward for the risk taken.

Secondly, brokers are more concerned with maintaining control of the customer journey. Using a third-party finance provider is a break in the journey outside the broker’s control. Many brokers want to retain this control and ensure high quality service to their clients by controlling financing and charges for mid-term adjustments, failed direct debits and arrears letters.

Thirdly, brokers wish to maximise the return on any cash equity they have accumulated.

Brokers need to weigh the benefits of simply broking their finance business to a third-party lender and lending to their own clients. There are benefits to each model, but as the banks continue to offer little or no return for deposits, brokers like everybody else in the market are looking for better returns on their hard-earned cash.

Ravi Takhar founded Bexhill UK in 2002 and has more than 25 years’ experience in the acquisition, growth, financing and disposal of financial businesses. Prior to creating the group, Takhar was head of financial services investment at Japanese investment bank Nikko, from 1998 to 2002.

 

How hidden charges sting the broker - Featured in the Insurance Age

piggy-bank-drowning

 

 

 

Bexhill UK’s Alan Atkins argues that cheaper is not always better when it comes to premium finance.

Transparency is clearly vital when arranging premium finance for clients, but are all premium finance providers as transparent in their dealings with brokers?

Are brokers aware how their commissions are calculated and are they getting a fair slice of the pie?

The headline rate is one thing, but the way in which some providers present their terms can mean that, in reality, there are a number of ways in which brokers' commission is eroded.

 

The first are minimum service charges; these are applied when the interest charge on the annual premium doesn't make the required return for the provider so the payments are increased. When average premiums are low and the minimum service charge is high, this can have a considerable effect on a broker's override commission earnings. Is this fair?

Arrears
Secondly, if a client paying by debit or credit cards goes into arrears many premium finance providers will deduct a percentage of your commission from the expected earnings for the months the client was in default. Why should brokers be penalised for this?

Eroding commissions in this way is essentially heaping hidden fees and charges onto brokers that, based on a personal lines book of business of say £12m GWP per annum and £7m of premium finance, could easily amount to more than £10k in lost commission based on say 25% of the book defaulting for one month.

This is also based on a variable commission rate; if brokers apply a high sell out rate this could of course be a lot more.

Breakdown
Thirdly, brokers should check how their override commission is paid and that there is full transparency month by month showing a breakdown of the commission earned from each policy.

This information should be easily available. All too often brokers are not offered a monthly breakdown, which if they were, would highlight the above issues and ‘eroded' commissions. This is at best lazy and at worst non-compliant.

Premium finance providers have a duty to be transparent with brokers. Brokers should be able to see exactly what they are signing up for by way of working premium examples and standard documentation showing fees and charges too in order to make an informed choice.

Brokers also need to be wary of Long Term Trading Agreements. Whilst a low rate in exchange for a long-term lock-in might look attractive on the face of it, it also means that they can't shop around for providers sometimes for a number of years.

When it comes to premium finance, it seems that cheaper is not always better.

Original article can be viewed here http://www.insuranceage.co.uk/insurance-age/opinion/2479358/how-hidden-charges-sting-the-broker