Briefing

FCA reports back on premium finance

On 3 February 2026, the FCA published its final report following its Premium Finance Market Study (MS24/2), finding that the cost of premium finance has fallen since 2022, and the FCA has concluded that it will not introduce a price cap or require that premium finance is provided without interest. More information is set out below.

Background

Premium finance allows customers to spread the cost of insurance premiums, often by paying monthly under a credit agreement rather than paying annually upfront, and it is particularly prevalent in motor and home policies. The FCA says that in 2023 it was used for roughly 23 million policies. The FCA launched the market study in 2024 due to concerns that some customers may not be receiving fair value and that competition may not be working effectively, while recognising that premium finance provides flexibility for customers who cannot afford to pay the premium upfront.

The report notes three main distribution models: (i) insurers providing premium finance directly; (ii) intermediaries that distribute insurance providing in‑house premium finance (“intermediary lenders”); and (iii) intermediaries that distribute insurance arranging premium finance through partnerships with specialist premium finance providers (SPFPs) (“intermediary brokers”). The FCA also notes the importance of price comparison websites as a distribution channel.

Outcome of the review

FVAs

The FCA reviewed fair value assessments (FVAs) carried out in respect of premium finance. Under the Consumer Duty’s fair value outcome, firms must ensure the price a customer pays for a product or service is reasonable compared to the overall benefits, and firms must produce an FVA. The FCA’s report sets out that firms’ FVAs often describe premium finance as spreading the cost of insurance, and in many instances higher prices for premium finance can be explained by differences in target market. However, the FCA concluded that some firms’ FVA’s fell short, in three main cohorts:

Inadequate methodology. There may be key details missing, such as definitions of the target market or no FVA document.
Incomplete methodology. These firms have carried out analysis that may contribute to a robust FVA but lack a firm basis, such as benchmarking against a favourable subset of products and using this as sole justification.
Not implementing fair value policies in practice. For example, a manufacturer might set out in their FVA that they will challenge APRs above a set threshold, but this does not happen.

The FCA goes on to set out examples of good and poor practice across various criteria.

In very brief summary:

Examples of good practice include:

identifying the primary motivation for premium finance as preference and necessity;
creating detailed breakdown of costs and undertaking thorough modelling to assess APRs;
identifying good sources of information to ensure the product meets customer needs, such as analysing complaint levels and carrying out root cause analysis;
having good procedures to discuss and analyse brokers’ FVAs and making sure premium finance and insurance products complement each other to deliver value.

Examples of poor practice include:

Defining the target market without enough insight into characteristics or motivations of customers;
overly relying on benchmarking to justify value;
conducting minimal analysis of whether fees charged to administer services contribute to fair value;
considering only the core features of the product in relation to quality, such as overall price and a customer’s ability to flex the initial deposit to get a monthly payment that suits them without considering the additional services the firm provides; and
an over-reliance on the SPFP to assure brokers that their product offers fair value.

Pricing models

There are two main pricing models. The first model is interest-free premium finance where the total cost of paying in instalments is the same as paying upfront, and the second is with-interest premium finance where customers pay interest as part of a regulated credit agreement, typically an additional 8-12% on top of premium. The FCA found that competition can work under both.

The FCA had concerns that customers might inadvertently ignore the premium finance costs at the point of submission, therefore leading them to select a lower premium policy whilst not being aware it has a higher cost when considering additional premium finance costs. However, research showed that customers on price comparison websites are highly price-sensitive to the overall cost of an insurance policy, and evidence gathered showed that the additional costs of premium finance are generally presented clearly so that customers can make effective decisions.

Both pricing models were found to be compatible with the Consumer Duty, as customers could compare and make informed decisions. Insurers incur additional costs for providing premium finance under both models and charging a higher total price to reflect this rather than spreading the cost across the entire customer base ensures that pricing is proportionate and transparent. However, as set out above, there are concerns with FVAs.

The FCA says that some external stakeholders have argued for a ban on interest pricing or some form of price cap. However, the FCA’s view is that a ban would increase premiums for all policyholders, which would have a financial impact for firms, and there would be a risk that customers with high-credit risk, and who are potentially vulnerable, would lose access to premium finance. If there were a price cap, there would be a high risk that firms would match their current interest rates to any FCA price cap.

Distribution chain

The FCA notes that brokers play three important roles: distributing premium finance products designed by SPFPs without which many brokers could not offer customers the choice to pay monthly; taking on the cost of bad debt in the event of policy cancellations pursuant to the agreement between the broker and the SPFP, meaning that the broker often carries out affordability checks upfront; and carrying out administrative tasks related to customer service and processing such as making mid-term adjustments and cancelling agreements.

The report goes on to consider areas such as commission levels, payment structure, and various provisions in broker/SPFP agreements such as minimum volume threshold requirements and exclusivity arrangements, but does not conclude that there are any issues requiring action in this area.

Next steps

The FCA says it will closely monitor premium finance APRs using data from regulatory returns, will continue to scrutinise FVAs and engage with firms where relevant, and will monitor the impact on the market due to the recent withdrawal of Close Brothers Premium Finance from retail premium finance, but concludes that no new market-wide interventions are needed.