Executive Summary
- What is new: Preliminary findings from the Financial Conduct Authority’s (FCA’s) market study of premium finance, which focuses on motor and home insurance, highlight concerns about affordability, value and transparency, but the FCA is not currently proposing limits on annual percentage rates (APRs) or a ban on commissions.
- Why it matters: The FCA identifies high costs for some consumers, and potential issues with commission-driven pricing and double charging. As the FCA’s review progresses, further scrutiny of those practices and the effectiveness of current regulations is likely.
- What to do next: Firms should consider benchmarking their premium finance products against the FCA’s findings, and be ready to address any outliers.
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The FCA launched its premium finance market study in October 2024, with a view to examining the use of premium finance products in the UK. The FCA has two specific concerns: that premium finance arrangements do not represent fair value for some consumers and that the premium finance market is not functioning in a competitive manner. Its preliminary findings (Paper) were released 22 July 2025 following conclusion of its phase one investigation.
Objectives
The FCA (wearing its competition hat) has ongoing objectives for the market study:
- To understand how competition works in the premium finance market.
- To understand the outcomes this competition produces for consumers.
- Based on findings, to consider whether there is a need for regulatory action that allows for a proportionate response to any harm uncovered.
This is driven, in particular, by the FCA concerns around how firms are meeting the “fair value” obligations under the Consumer Duty.
Key Findings as of July 2025
Remedies. The Paper notes that the FCA is not currently proposing any of the following remedies which could lead to a reduction in the availability of premium finance products:
- A market-wide APR cap.
- A mandate for 0% APR.
- A commission ban.
Widespread use and consumer profile. Premium finance allows consumers to pay insurance premiums in monthly instalments rather than a single annual payment. The Paper notes that, for some, premium financing is a legitimate choice which suits their personal economic circumstances. However, for others who cannot afford to pay annually, premium finance is a necessity, and thus it naturally affects the lowest income groups in society. At the time of the launch of the market study, the FCA noted that 79% of adults in financial difficulty have used premium finance, and over 20 million people are estimated to pay for their insurance this way. The Paper notes that, in 2024, 60% of motor and 41% of home insurance customers paid by instalments because they cannot afford to pay annually.
Market structure and business models. Premium finance is provided through various models. Large insurers and brokers may self-fund premium finance, selling the product alongside their own insurance products. In contrast, smaller brokers often use specialist premium finance providers (SPFPs), who lend funds and pay commissions to brokers.
Cost of premium finance. Typically, APRs range from 20% to 30%, but it is estimated that almost 20% of consumers pay APRs in excess of 30%. Illustrative products sampled by the FCA suggest that it can cost consumers in the region of 8% to 11% more to pay monthly rather than annually on home and motor policies. However, the Paper does note that premium finance APRs are generally lower than overdrafts (35%), comparable to or slightly lower than some credit cards (23% to 32%) but considerably higher than personal loans (11%). The Paper observes that consumers often pay more when premium finance is arranged through brokers and funded by SPFPs. It is here that it is common to see APRs above 30%.
Profitability and margins. The Paper acknowledges that providing a monthly payment option inherently causes premium finance providers to incur a “material level of costs”, but states that revenues “materially” exceed costs for some providers. The pricing of consumer credit products, including premium finance, factors in the prevalence of “bad debt” or default. However, bad debt ratios are lower for SPFPs (0.6%) and intermediary lenders (1%) than for credit cards (1.9%). Margins on premium finance are higher than those on core insurance products, with margins ranging from 14% to 62% across different provider types between 2018 and 2023. Insurers had the highest average margins with 53%, whilst SPFPs averaged 24%.
Consumer understanding and comparisons. FCA rules require that consumers are able to understand the cost of paying monthly versus annually. The initial findings suggest these standards are generally being met, but consumers may face barriers when paying for their insurance through credit options other than premium finance. The Paper attributes this to difficulties in distinguishing between cost of credit, interest rates and APR.
Potential double charging. The Paper raises concerns that some consumers may face higher insurance premiums in addition to finance charges when opting to pay monthly, referred to as “double dipping”. FCA rules require that any increase in premium for monthly payers must have an objective and reasonable basis. The Paper further notes that some insurers consider that the choice of payment method (monthly versus annually) is correlated with the insurance risk for those consumers who pay on a monthly basis. The Paper notes that, if the FCA determines that firms are not applying an objective and reasonable basis for such an approach, then it will consider its supervisory approach on a firm-by-firm basis.
Next Steps
The FCA’s premium finance market study will continue with a focus on:
- Conducting further analysis of higher-priced products, their value, profitability and the impact on vulnerable customers.
- Assessing whether different approaches in motor and home insurance (including 0% APR models) provide fair value.
- Examining the effects of commission and clawback arrangements to ensure they do not create unnecessary friction or poor outcomes.
- Investigating how effectively consumers can compare premium finance with other credit products and considering improvements to consumer tools and disclosures.
The FCA will use its supervisory and enforcement powers where firms fall below existing standards, and will consider further regulatory interventions if justified.
The FCA will consider scenarios on a case-by-case basis and will take action against specific structures that it finds not meeting their rules.
The FCA invites feedback from stakeholders by 30 September 2025 to inform the next phase of the study and ensure that premium finance delivers fair value and effective competition for all consumers.
Conclusion
The FCA’s initial findings raise concerns about affordability, value for money, and transparency in the premium finance market, especially for vulnerable consumers. The FCA will continue its review focusing on high-cost products, commission structures and how information is disclosed to consumers.
As the review progresses, we anticipate that there will be further scrutiny of whether the current regulations for premium finance are appropriate.
Firms should look to benchmark their premium finance products against the FCA’s findings, and be ready to address an outliers (either by ensuring any such differential treatment can be justified, or looking to amend the underlying products).
This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.