Background

Millions of holders of insurance policies are reliant on premium finance—the system that enables policyholders to pay their annual premium in instalments – to be able to afford essential insurance including motor and home insurance. Recognising the fundamental role this product plays in consumer access to essential insurance, the Financial Conduct Authority (FCA) initiated a formal market study in October 2024.^[1]

The study was launched with two primary concerns: first, that premium finance arrangements may not offer fair value for some consumers, and second, that the market may not be functioning in a competitive manner. These concerns are directly linked to the FCA's broader "Consumer Duty", introduced in 2023, which requires firms to deliver good outcomes for retail customers and ensure that products and services offer fair value. The market study also aligned with one of the FCA's four strategic priorities for 2025 – 2030^[2], helping consumers navigate their financial lives. These concerns are also echoed in the FCA's Pure Protection Market Study (launched March 2025), which similarly investigates whether consumers are receiving good outcomes and fair value from essential insurance products like life insurance, critical illness cover, and income protection.

The FCA published its initial first phase findings from the premium finance market study on 22 July 2025 in the "Premium Finance Market Study Update Paper" (MS24/2.2) (the "Update Paper") and asks for comments by the end of September 2025. In the next phase, the FCA will carry out further analysis and engagement with firms, focusing on certain areas identified as concerns from the initial phase (higher priced products, understanding differing approaches in motor and home products, commission and clawback arrangements and the ease for consumers to compare premium finance with other credit products). The FCA plans to carry out further analysis to understand better the nature of competition within the premium finance market and aim to publish a final report by the end of the year.

Importance of Premium Finance

The Update Paper starts by outlining the critical role of premium finance in the UK’s insurance system. It's finding that 48% of all motor and home policies were paid for via instalments in 2023 underscores its fundamental importance. A more telling statistic, however, is the reason for this choice. In 2024, 60% of motor and 41% of home insurance customers who paid monthly did so because they could not afford a single annual payment.

This highlights an inherent conflict: premium finance is an important tool for financial inclusion, ensuring access to legally mandated products like motor insurance for those with lower incomes. However, as the FCA notes, these same consumers often have "low levels of financial resilience," making them potentially vulnerable to high costs within these essential finance arrangements.

A Complex Market

The Update Paper describes a fragmented market structure. The FCA describes a landscape where large insurers and brokers typically self-fund their premium finance offerings, integrating the cost into their overall product. In contrast, smaller brokers rely on Specialist Premium Finance Providers (SPFPs), who provide funding and technological infrastructure in exchange for commissions paid by the brokers.

This structural difference directly influences cost. The FCA’s central concern is the "wide variation" in the Annual Percentage Rates (APRs) charged. While most consumers (around 60%) face APRs between 20% and 30%, almost one in five are paying rates in excess of 30%. These higher rates are disproportionately found in deals arranged by brokers and funded by SPFPs.

To illustrate this, the FCA points out that, on a typical home insurance policy (£220 premium), a 25% APR adds £24 to the total cost—a 10% increase on the premium itself. For a motor insurance policy (£400 premium), the extra cost ranges from £35 to £51. The FCA acknowledges that these rates are generally lower than arranged overdrafts (35%) and comparable to some credit cards (23-32%), but they are significantly higher than personal loans (11%). The FCA's concern is that for many, premium finance is not a choice between credit products but may be their best route to insurance, limiting their ability to shop for cheaper credit.

Profitability, costs, and "double dipping"

Profitability. A particularly revealing aspect of the study is the analysis of profitability. The FCA concedes that providing premium finance incurs "a material level of costs," including funding, operational expenses, and bad debt. However, it concludes that "revenues materially exceed costs for some providers."

Margin data. The margin data received by providers is revealing. Between 2018 and 2023, margins (revenue minus economic costs) across the market ranged from 14% to 62%. Insurers, often using a self-funded model, recorded the highest weighted average margin at 53%. SPFPs, in contrast, averaged 24%. This suggests that where financing is integrated into the insurance product, the profitability for insurers appears substantial. We note however, that the FCA's findings on APR found that consumers pay more as an APR on deals arranged by brokers and funded by SPFPs, as indicated above.

The FCA suggests that in highly competitive channels like Price Comparison Websites for motor insurance, firms may find it difficult to recover the cost of offering 0% finance within the headline premium, leading them to charge a separate, higher APR. This explains why 0% finance is far more common in-home insurance (over a third of customers) than in motor (less than 3%).

The Update Paper raises the concern of "double dipping"—the practice of potentially charging monthly payers both a finance charge and a higher underlying insurance premium. The FCA states that its rules require any such premium increase to have an "objective and reasonable basis." Some insurers have argued that the payment method is correlated with insurance risk. The FCA’s response is a clear warning: it will examine this justification on a "firm-by-firm basis" and challenge any approach lacking an objective basis.

Next steps

The FCA has helpfully indicated that it does not currently envisage proposing any of the following as remedies:

1. No market-wide APR cap: the FCA's concern is that this could reduce availability of premium finance and harm access to insurance.
2. Not mandating 0% APR: the FCA seems to be recognising that the economic costs of providing finance are real and must be recovered somewhere.
3. No commission ban: the FCA is thereby acknowledging that the broker-SPFP relationship is crucial for smaller firms and is already covered by existing remuneration and fair value rules.

However, the FCA will focus, in the next phase of the market study, on gathering targeted, evidence-based analysis from the industry to assess compliance with existing rules, particularly the Consumer Duty. The regulator has elaborated that this next phase will focus on:

• Looking more closely into high-priced products to assess their value and impact on vulnerable customers. This could mean the FCA will challenge firms to justify the pricing of high-cost products, particularly those sold to vulnerable customers, and may require them to demonstrate how these products provide fair value.
• Understanding the fair value implications of different models (e.g., embedding cost in home insurance vs. transparent separate pricing in motor). This means FCA scrutiny of pricing models, requiring firms to show that their chosen approach, whether it is embedded or separate, does not lead to unfair value for consumers and that all associated costs are transparently communicated.
• Examining commission and clawback arrangements to ensure they do not create perverse incentives or poor outcomes. Firms should therefore expect the FCA to request detailed information commission structures and clawback policies, and challenge where those structures/policies give rise to conflicts of interest.
• The extent to which consumers can effectively compare premium finance with other credit products.

It is important to note that the FCA has emphasised that where firms are found to be falling short of existing standards under the Consumer Duty, ICOBS, and PROD rules, it will not hesitate to use its "supervisory and enforcement toolkit." on the firm.

Implications for the UK insurance Sector

The FCA’s market study has implications for every player in the insurance distribution chain.

For insurers and large brokers with in-house finance operations, the results of the Update Paper might prompt a review of their pricing models. Firms may wish to prepare justifications for their premium finance margins and, critically, provide an "objective and reasonable basis" for any difference in the underlying insurance premium between annual and monthly payers, particularly where margins are comparatively high.

For smaller brokers and SPFPs, the focus will be on their commercial arrangements and the APRs they charge. The FCA has noted that the highest APRs are often found in this part of the market. These firms will need to demonstrate that their commission structures and pricing provide fair value and do not take advantage of a captive audience. Transparency and the ability to prove that costs—including bad debt and commissions—are proportionate to the charges levied will be paramount.

For all firms, the study reinforces the importance of the Consumer Duty and the need for firms to be able to provide evidence that their premium finance products represent a fair deal for the customers who rely on them, especially those in vulnerable circumstances.

In conclusion, the findings from the first phase of the FCA’s market study acknowledges the necessity for premium finance whilst challenging the industry to prove that its current practices are fair, competitive, and transparent. We expect that firms will be engaging with the FCA on the initial findings and use the opportunity for feedback by 30 September, to provide further explanation of their own practices, in order to shape the next phase of the study.

[1] For more information, see our article: UK Insurance Sector: The Renewed Focus on the International Competitiveness and Growth - 4 September 2025

[2] For background, see Market study into the Provision of Premium Finance - Proposed Terms of Reference