FCA to review motor insurance

The motor finance market is coming under further regulatory pressure, with the launch of a new cross-government motor insurance taskforce, which will use analysis from the Financial Conduct Authority (FCA) to identify ways to drive down what ministers describe as “spiralling” car insurance costs. In parallel, the FCA has announced a competition market study, examining whether people who borrow to pay for motor and home insurance are receiving fair, competitive deals.

Transport Secretary, Louise Haigh, and Economic Secretary to the Treasury, Tulip Siddiq, will bring together industry groups and consumer champions such as the Association of British Insurers (ABI), Citizens Advice, Which? and Compare the Market, as well as insurance regulators in the new taskforce.

The move forms part of the government’s manifesto commitment to act on increasing consumer costs, which stunt the economy and prevent growth. Ministers pointed to FCA analysis suggesting motor insurance premiums have grown by an average of 21% since June 2022 – far higher than in comparable economies such as Germany, France, Spain and Italy.

The FCA will analyse the causes of increased costs in motor insurance and will look closely at claims costs, reviewing claims handling arrangements and factors impacting different types of claim. The regulator will also analyse the impact of rising insurance prices on different customer groups, such as younger and older drivers and those from ethnic minority backgrounds or on lower incomes.

Premium finance

Separately, the regulator’s review will focus on premium finance, which allows people to pay for insurance in instalments in order to spread the cost and is used by an estimated 20 million people, including 79% of adults in financial difficulty.

With the average yearly rate on the amount of money borrowed ranging between 20% to 30%, the FCA says it is concerned that premium finance may not be providing fair value.

The market study will review whether the products represent fair value, how well customers are made aware of their financing options, the role of commission, and other potential barriers to effective competition in the motor and home premium finance market.

The FCA expects to publish an interim report following the market study and proposed next steps during H1 2025.

GAP intervention

The FCA’s latest intervention in the motor insurance market follows on from its recent actions relating to Guaranteed Asset Protection (GAP) insurance.

Last September the FCA wrote to firms manufacturing GAP products asking them to take immediate action to prove customers are getting a fair deal, saying it had identified concerns with the design of GAP insurance across all distribution channels, and claiming products were unlikely to be providing fair value to customers in line with the recently introduced Consumer Duty rules.

This was followed up in February this year, when the FCA required multiple insurance firms to halt sales of Guaranteed Asset Protection (GAP) products over concerns that the product is failing to provide fair value to some consumers.

In May, the FCA confirmed that several firms have been permitted to recommence their sales of GAP insurance, following action by the regulator to improve fair value. The remainder are still in discussions with the regulator about the way forward.

In addition, the FCA’s review of motor finance and discretionary commission arrangements is ongoing, with the deadline for completion of the work now extended from September this year to May 2025.

“Of course all firms want to embrace best practice, but the constant intervention and requirements for data and analysis – sometimes going back years – is proving a substantial overhead.

“There is a risk that as firms’ costs inflate, and the risk of retrospective changes in the approach to regulation increases, so some lenders will exit the market. That is bad news for consumers as it reduces choice and competition.

“There is a real need for regulators and government to educate themselves about the operations of the motor finance sector and provide clarity about what is expected from providers, now and in the future. This uncertainty has had a detrimental effect on lending, to the consumer’s disadvantage. 

“The next AFC conference in November will focus on the likely impact of the new UK Government on the auto, equipment and asset finance industries and we will be exploring this issue in more depth then.”

Find out more about AFC’s November conference here.