Shares in Admiral and Direct Line slumped on Wednesday after the City watchdog’s insurance head suggested that insurance firms may soon face regulatory action for premium finance.
In an interview with Insurance Post, Matt Brewis, head of insurance at the Financial Conduct Authority (FCA), described premium finance as a “poor product”.
He warned that the FCA has “talked about it enough” in a sign that regulatory action might be in the offing.
Premium finance involves taking out a third-party loan to pay for an insurance policy. The use of premium finance has increased as the cost of basic insurance policies has risen.
Consumers using premium finance generally pay for their insurance policies in monthly instalments, which costs more than paying annually.
An FCA open letter published last year noted that consumers who used premium finance were “typically aware it costs them more” but were “often unable to afford the single annual payment”.
“It is a tax on being poor,” Brewis told the Insurance Post. “Those who are paying monthly are subsidising those who can afford to pay annually.”
Shares in Admiral and Direct Line lost 5.8 per cent and 6.8 per cent respectively on Wednesday.
Insurance firms have already come under fire from the regulator following the introduction of the Consumer Duty over the summer.
The FCA’s flagship regulation requires firms to prove they are providing fair value to their customers.
In September Brewis warned that in some cases firms were failing to offer fair value on the type of add-on insurance to motor cover, known as guaranteed asset protection.