FCA: cost of finance options for insurance not being explained clearly to online consumers

The Financial Conduct Authority (FCA) found failings in the way some insurers and insurance intermediaries, including price comparison websites, are displaying information about the cost of home and car insurance to online consumers (21-page / 218KB PDF) in a review it conducted of the market.

In particular, it said consumers are not always provided with "clear and appropriate information on payment options and the different costs associated with these choices". The regulator warned that it could take enforcement action against businesses that do not improve their practices.

In a report detailing the results of its review, the FCA said that consumers may not have realised that they would face higher costs in paying for insurance in instalments rather than upfront and that they may have found it "difficult to compare the total costs of the different options".

The FCA also identified shortcomings with the information that insurers and insurance intermediaries provided about the option of paying for home and motor insurance products in instalments.

"Firms do not always provide appropriate information about the instalment option being offered," the FCA said. "Where credit is provided under a regulated credit agreement, the lender (or a credit broker acting on its behalf) is obliged to provide a customer with pre-contract information and an adequate explanation, covering specified matters. Customers who are not provided with such information and explanations are less likely to be able to understand the costs of the finance arrangement and to assess whether the agreement is suited to their needs and financial situation."

John Salmon, a technology law expert for Pinsent Masons, the law firm behind Out-Law.com, who focuses on the financial services sector, said that the review highlighted how important it is for insurers to think carefully about the overall customer experience when making compliance decisions.

"Insurers and their legal advisers need to think more in terms of the whole customer journey. It is not enough anymore to think solely about the words required to comply with transparency obligations but also the timing of when information is presented and the ease at which customers can digest the ways in which a business chooses to present information online", he said.    

Insurers and insurance intermediaries also need to be more explicit in explaining when they act as credit brokers in finance arrangements being offered to consumers, the FCA said.

"Firms arranging premium finance do not always take appropriate steps to provide sufficient, clear and consistent information to ensure customers understand the role they are performing," it said. "Where credit is involved, there are specific [Consumer Credit sourcebook] obligations on credit brokers regarding disclosure of status (including links with lenders) and fees or commissions. In this regard, in many cases it is not made clear to the customer that the firm is acting as a credit broker, the nature of the relationship between the firm and the finance provider, and the existence of any remuneration that could influence the broker’s recommendation or materially impact the customer’s decision."

The regulator said that it is concerned that consumers may not be "achieving fair outcomes when purchasing insurance and linked finance" as a result of the information disclosure shortcomings it identified. Better information is required to enable "informed decision making", it said. Without it, effective competition in the market is at risk, it said.

Linda Woodall, acting director of supervision at the FCA, said: "Consumers should expect clear information about the payment options available to them. Regardless of whether people choose to pay upfront or in instalments, it’s important that they can see exactly what they are signing up for and how much it costs so they can decide whether they are getting a fair deal."

Changes to UK law that came into force in March addressed an "anomaly" in the way consumer credit rules were applied to insurance policies where premiums were paid in instalments.

Previously, insurers could offer borrower-lender-supplier credit agreements for a fixed sum, and for which no fees or charges are applied, without being forced to obtain a consumer credit licence if no more than four repayments were due. However, the law was updated to allow insurers to offer annual policies with premiums payable in monthly instalments without being at risk of providing regulated credit to their customers.

At the time the changes were announced, consumer credit expert Ian Roberts of Pinsent Masons, the law firm behind Out-Law.com, said that the change in the law was "fantastic news" for the insurance industry.

Roberts said: "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."