The challenges around justifying fair value in premium finance

In September, Which? published a report criticising premium finance, echoing comments made by the FCA last year that interest rates of 30% APR for monthly premiums are not acceptable.

Part of the reason why this issue persists is that there is more than one way to justify fair value, including:

• Fair value is whatever a customer is prepared to pay, as defined by a signed contract.
• Fair value is a simple charging structure, that prioritises those least able to pay.
• Fair value is the cost of providing a service, plus a reasonable margin to make the service commercially sustainable.

Reasonable costs for premium finance include:

• The cost of administering a monthly policy
• Additional cover given if a monthly payment is missed, up to the point the policy is cancelled
• The opportunity cost of receiving the money in instalments, instead of up-front.

Fair value is any price that represents good value, given the alternatives available to different cohorts of consumers. For example, a customer who can only obtain credit at a high rate of interest may find genuine value in premium finance that is priced significantly below that level. However, this argument works both ways – firms will fail this fair value test if their customers contain a significant proportion of people who have access to cheaper credit elsewhere.

The only way to cut through the ambiguity is to choose a justification from the list above and demonstrate that customers are aware of – and satisfied with – the outcome they are getting. Professionals can do this through their firms’ governance systems, or regulators can do it through prescriptive rules.

The profession must resolve this issue so it can focus on its core purpose: honouring a promise of help in times of need.