Consumer credit law changes will make it easier for insurers to offer payment of premiums in instalments

New regulations published this week will extend the exemption from consumer credit laws contained in the Financial Services and Markets Act (FSMA) to agreements with up to 12 monthly repayments. Currently, an agreement will be only be exempt if no more than four repayments are due. The change will take effect on 18 March and apply to agreements where no additional charges or interest are due.

Consumer Credit expert Ian Roberts of Pinsent Masons, the law firm behind Out-Law.com, said that the announcement was "fantastic news" for the insurance industry and that "This change has been in the pipeline for a while and it is good to see the UK move into line with other members of the EU by exempting suppliers providing cost-free 12-monthly instalment credit," he said.

The Consumer Credit Act (CCA) applies to businesses offering credit to individuals (including sole traders), small partnerships and other unincorporated associations, including overdrafts, credit cards and personal loans and selling goods and services on credit, as well as to those offering goods for hire or providing debt collection, debt administration and credit broking.

The FSMA exempts borrower-lender-supplier credit agreements for a fixed sum, and for which no fees or charges are applied, from the scope of the consumer credit regime provided that agreement is repayable in no more than four instalments. However, industry body the Association of British Insurers (ABI) has said that this created an "anomaly" where annual premiums payable in quarterly instalments are exempt from CCA requirements while those payable in monthly instalments are subject to these requirements.

The majority of ABI member insurers allow consumers to pay for general insurance products either in full at the start of the policy or in monthly instalments. Policies can be cancelled at any point during the 12 month period, with the premium either refunded pro rata or, in the case of those paying monthly, the outstanding instalments not collected. According to ABI estimates, around 50% of consumers opt to pay annual insurance contracts in instalments, with the proportion of those paying in instalments reaching as much as 80% at individual firms.

The EU's Consumer Credit Directive (CCD), the requirements of which are incorporated into UK law via the CCA, specifically excludes insurance contracts where the premium is paid in monthly instalments from the definition of 'credit agreements'. According to the ABI, all 22 EU member states for which data is available have exempted payment of insurance instalments where no interest is payable from their national legislation, and 20 have also exempted payment of insurance instalments with interest.

"This puts UK firms at a competitive disadvantage compared to their European neighbours," the ABI said in a 2013 submission to the UK Treasury. "Bringing the CCA in line with the directive would reduce costs for insurers, without decreasing protection for customers, who are provided for under existing FCA regulation."

"Consumer credit requirements place a disproportionate burden on insurance firms, for very little, if any, added protection for the consumer. Treating insurance paid in instalments as credit is not risk-based, increases costs significantly and goes against better regulation principles. In addition, given that payment by instalments increases access to protection for the young and/or financially excluded, reducing unnecessary burdens for such products should be a government regulatory priority," the ABI said in its submission.

According to the ABI, compliance with CCA requirements cost insurers over £50 million annually even before the addition of additional creditworthiness checks. In addition, the requirement that a credit agreement is not binding until the customer returns a signed copy of the agreement to the 'lender' exposed insurers to additional risks, it said.