High time for finance

To paraphrase words often used by the Financial Services Authority, premium finance helps brokers maintain efficient, orderly and clean accounts. If this is the case, though, why aren't more of them taking advantage of a market where providers are practically falling over themselves to offer good commission, service and competitive deals?

It seems many brokers are reluctant to change their existing ways of doing business. According to Rob Fry, sales and marketing manager for Amber Credit, there is too much apathy when it comes to investigating premium finance options: "It seems incredible that brokers would choose to reject earning commission in favour of using an insurer's scheme, but that is what's happening in many cases."

However, the impending onset of FSA regulation could well bring about a sharp increase in the number of brokers using the premium finance sector. According to Bob Golden, chief executive of Close Premium Finance, "new regulations mean a change in the way brokers manage clients' funds. They will be spending more time and money on managing these and premium finance helps both reduce the burden and increase income."

Could do better

In the current unregulated market, there are some bad practices around which brokers will need to eliminate. Golden gives the examples of taking commission before money is received, a lack of clarity in accounts, and pooling of client money sent to third parties for short-term investment.

The FSA final rules in CP 174 state that money must now be held in a statutory or a non-statutory trust and that commission may not be taken out until the money has been received. Reconciling money every 25 days, maintaining transparent records and reporting to the FSA are all part of the compliance process.

Premium finance providers can help brokers get on track - but it is a message many have yet to take on board. Simon Horswell, sales and marketing director for Aascent, comments: "It astounds me that penetration by the independent providers is only in the region of 15% and that more brokers continue to use insurers' schemes - which may be charging higher interest rates and not paying commission. From the client's point of view, this is not good advice; and for the broker it doesn't make business sense." He adds that relying on an insurer for financing may not be to the broker's advantage. "Many insurers also have direct arms. Brokers need to protect their business and allowing insurers to bypass the broker could lead to poaching."

Horswell is in favour of premium finance being regulated by the FSA too, since he believes it is an insurance, as well as a financial, product: "The FSA clearly wants to see brokers manage clients' money better." He explains that insurers can be funded direct and brokers would still be able to earn commission on the finance: "In that case, brokers would submit the business but would not directly handle client money. We would be acting on behalf of brokers, to whom the clients belong - and as we are a finance-only company, there is no risk of poaching."

Belfast-based Premium First targets high-street brokers, and its head, Richard Welsh, believes some intermediaries will be on a steep learning curve. However, he is opposed to scaremongering: "Regulation should be viewed as a good way for brokers to get their houses in order. Those who are already General Insurance Standards Council members should not have problems."

No one is pretending that the FSA will have the resources to go through every regulated broker's books. But some firms will be singled out, and any brokerage that is suspected of trying to cook its books could find itself reported to the regulator.

Welsh explains premium finance makes for more transparent accounting. "Brokers know where they are with cashflow. They can be specific when funds are received and payment through the Bankers' Automated Clearing System eliminates the need for cheques. They can track money and ensure it is kept in separate accounts. Commission is paid into a different account and statements we provide are detailed and broken down."

The costs issue

Fry says FSA regulation should focus brokers' minds - not least because many are going to be faced with a sharp increase in their costs, which they will need to offset. "They will need to ensure processes and systems are compliant and many will need to buy new software. Training will also involve expenditure. Brokers should be asking themselves if they want to pay for regulation out of existing income."

He argues that the new environment will also allow brokers to assess the service standards on offer. "Apart from commission, the way the premium finance service provider manages its relationships with brokers is crucial. It may also put some insurer's schemes under the spotlight; many do not manage direct debits particularly well."

Ian Woodley, sales director for Benfield Premium Finance, says technology will be pivotal to selecting a partner. "Many brokers still think working with a premium finance provider will be laborious and paper-driven, but technology advances mean all transactions are done electronically. There has been a leap forward and regulation is a real chance for brokers to shake up their business practices. I still come across firms which are taking post-dated cheques, which the FSA will not allow."

Regulation is set to bring advantages to the consumer, but for brokers it is going to mean considerable outlay. All premium finance providers emphasise that more brokers need to use their schemes to replace some of that outlay. As Golden says: "There will be increased costs from establishing new terms of business with clients, solvency compliance, higher professional indemnity cover, the FSA's application and annual fees, the ombudsman levy and audit fees, in addition to additional administration."

He says premium finance creates income for brokers and "the income from this does not have to be disclosed unless the client requests it; and this income does not have to be included when determining capital requirements or FSA fee obligations. This is in addition to the cashflow management benefits and automated IT processes and reports that will be of assistance to many brokers."

With so many arguments being made in its favour, 2004 could be the year when more brokers look at premium finance as a valuable business planning tool as they move into a more professional environment.