Are your instalments costs Consumer Duty compliant?

In a recent Consumer Intelligence webinar, panellists came together to discuss the nuances that exist within the realm of instalment payments, shedding light on the current appetite among consumers, and trends that are playing out at a market level, as well as the various implementation strategies, and potential associated regulatory risks.  

This article delves into four key points that came out of the webinar. 

In today's economic climate, financial flexibility has become paramount for many individuals as they grapple with the rising cost of living. As a result, instalment payments have gained popularity among consumers looking to ease the burden of escalating insurance premiums.  

Attendees heard from Matt McMaster, Insight Analyst at Consumer Intelligence, who revealed that the proportion of consumers turning to instalments payments for their car insurance has increased by around 12% in the last year or so, with a similar upward trend seen in the home insurance space.  

“We’ve not seen these kind of levels since the financial crisis of 2008”, reported McMaster.  

Guest panellist, James Daley, Managing Director of Fairer Finance, was unsurprised by the data. “People are feeling the pinch on household budgets, which is something that's been ongoing for a couple of years now. They're going to look for ways to manage the cost of motor insurance. Even in the good times, insurance was a lumpy chunk to come out of your bank account, if you were going to pay it all in one go. 

“Personally, I’ve just had an 80% increase in my renewal. Quite suddenly it starts to become quite a serious sum of money. So, it’s no surprise that more people are turning to instalments. But, of course, that ups the pressure on the industry to make sure that, in the face of Consumer Duty, insurers can justify the cost they're charging.”  

At Consumer Intelligence, a unique metric has been developed to measure the additional cost of paying by instalments, called the ‘Cost of Credit’. This metric establishes the £ or % difference between the annual premium and total cost of paying by instalments.   

Using this metric, McMaster revealed that the range of cost of credit in the home and motor markets is vast – ranging anywhere from 0% to over 20%. 

Furthermore, McMaster delved deeper into the varied instalment strategies employed by different brands. He found that in the home market, the split between fixed and variable cost of credit is almost 50/50, while the motor market experiences a larger proportion of brands offering varied costs of credit. Astonishingly, McMaster discovered that one particular brand offered a 0% cost of credit for home products, but 9.5% in the motor market. 

The presence of diverse strategies, lacking consistency both between and within brands, creates a challenging task to define what fairness means in the instalments market. 

One crucial aspect that insurers must address is the justification for their premium credit finance strategies. With the cost of premiums on the rise, it’s essential for insurance providers to ensure that the cost of instalments remains proportionate to their costs as an organisation.  

This transparency is crucial as it builds trust with consumers and prevents any accusations of unfair practices. Insurers must collaborate with industry trade bodies to ensure compliance with Consumer Duty, which advocates for fairness and transparency in financial services. 

Consumer Duty, which came into force this summer, mandates that insurers must evidence that they are delivering ‘good outcomes’ to consumers. Outcome 2 of the Consumer Duty is all about ensuring consumers get ‘fair value’, meaning that the amount a consumer pays for a product or service must be 'reasonable' when compared with the benefits the product or service offers. 

Panellist Ann Constantine, COO at Consumer Intelligence, spoke of conversations with several major insurer clients, and when asked, in the wake of the new Consumer Duty, whether insurers across the board are looking closely enough at their instalments offerings, she was confident many were. “[Instalments] is definitely an area of focus for them – and anyone who isn’t looking at it, definitely should be”. 

Failure to maintain consistency across an insurer's approach to instalment payments can lead to governance issues. In such cases, the Financial Conduct Authority (FCA) may subject the insurer to increased scrutiny, extending to all elements of insurance, not just credit-related matters.  

Therefore, insurers must possess a comprehensive understanding of their costs and position in the market to justify their payment decisions. Knowledge and awareness of the current landscape are powerful tools in navigating potential pitfalls. 

On this, Constantine noted, “So it's a bit of a cliché, but knowledge is power, right? You need to know what your costs are, how you're positioned in the market, and more importantly, how you made the decisions that you made, so that you can evidence them.” 

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