Premium Finance & Regulation - Which way for premium finance?

In terms of it becoming regulated under Financial Services Authority, Ed Ferrell, director of sales and operations at aascent, points out that premium finance is already 'fenced in' by regulation - specifically the FSA's Consumer Credit Act, which was updated this year on 31 May, and the Data Protection Act.

According to Ferrell, there has been a shift in brokers' relationships with premium finance companies as the investigation in the US by Eliot Spitzer and regulation in the UK has caused brokers to re-evaluate key relationships. Ferrell explains: "Brokers have become more sensitive. Instead of exclusive arrangements with premium finance providers involving profit shares, companies are now offering more than one provider to the client. Also, brokers are becoming wary of entering multi-year agreements in a softening market."

Ferrell also believes the premium finance market is enormous and divides the target audience into three groups: "Those who must take it; those who realise the time value of money and a huge group in the middle that pays cash when it should not."

However, Bob Darling, managing director of Singer & Friedlander, disagrees with Ferrell. He says Singer & Friedlander has signed several long-term deals over the last few months, including a three-year contract with Welsh broker Moorhouse. Darling says: "If the lender is honest with the rate changes, a longer-term deal can provide the broker with stability." One area in which he has seen change is volume bonuses. He says: "Since regulation, these are increasingly being reflected in more traditional deals such as net rates and commissions."

Unsurprisingly, given new client-money rules, regulation has made premium finance more attractive to brokers. Jim Fergus, accounts director at Birmingham-based Premier Risk Management, a member of the Cobra Network, cites the FSA rules on paying insurance companies, and the anticipated pressure from insurance companies to make earlier payments of premiums. He adds: "Companies expect credit, especially with some of the sums involved."

Broker Premier Risk Management, which uses Premium Credit and Close Premium Finance and has a gross written premium income of £1.5m, is rewarded with volume bonuses if they pass on, for example, £0.5m or £0.75m worth of business to a premium finance company. Fergus says this has not changed since the introduction of regulation.

Neil Lowe of Needham Insurance Services, and also a member of the Cobra Network, says: "The only thing that has changed since regulation is that we now have the option to receive the finance in three instalments, instead of the normal six or 10. This was an initiative we discussed with the premium finance provider and, as a result, cash flow has improved."

However, brokers and accountants need to be aware that FSA client-account rules could become an issue, especially when it comes to recourse agreements. This agreement means the premium finance company can recover defaults from the broker. Prior to regulation, some brokers would use one client's premium payment to pay another client's premium over to the insurer and, therefore, they had not necessarily collected the premium in full from the client before it was paid over. Nowadays, however, this would not conform to client-money rules.

Ian Ritchie, managing director of RWA Group, which offers client support, says: "There is a major issue where the finance is on a recourse agreement and defaults, thus resulting in the finance company paying a 'net' amount to the broker; for example, if a broker has three new policies at £1000 and one is defaulted at £750, there will be a net of £2250 paid to the broker. This leaves a hole in the client account until the insurer issues any cancellation credit, or permanently where no cancellation credit is due. This means that the broker must pay the default figure into his client account from his office account and effectively fund the debt himself."

Ritchie says this problem can become worse if the money is taken straightaway. He explains: "Even worse, there are still companies that take default monies direct from the broker's client account electronically, which causes the broker to breach the rules as, under these circumstances, (for statutory trust operators) they are using someone else's money to repay the debt."

Despite Ritchie's concerns, the premium finance market has remained relatively unchanged since 14 January. The industry, which has consolidated over the past few years, is dominated by a handful of providers and the market seems set to grow. Neil Lowe says: "Premium finance is part of the broker's toolkit. We would not mind if all our business was done using premium finance."

Ritchie comments further: "From a regulatory standpoint, brokers operating a statutory trust account need to ensure that premiums are received from the finance company, prior to settling the insurer's account, as 'robbing Peter to pay Paul' is a breach of the money rules. In practice, this should not be an issue, as brokers will ensure that any deferred period before they are paid by the finance company, falls within the credit period granted by the insurer."