Brokers facing further rising costs

A number of brokers have recently received notification from a lender in the premium finance market, that their rates are rising.  

The rate rises come following news of increasing costs and pressures on brokers from rising IPT, the impact of the Ogden rate cut and other crippling economic pressures.

The premium finance provider Bexhill UK, has confirmed it has no current plans to increase rates or fees. Ravi Takhar, Chief Executive Officer of Bexhill UK comments: “Brokers are being squeezed from every angle and news of these rate rises is bound to concern and anger some brokers, particularly when the reasons given for the rate rises are due to technology spend by the lender.  For brokers that have seen no evidence of these benefits, this rate rise is a bitter pill to swallow.”

An example rate rise of 0.35% on a Personal Lines book of £2m will now cost broker’s in-excess of £7k, which is a considerable amount. This cost has to be either absorbed or passed onto the customer on top of rising costs in premiums and IPT.

An Insurance Broker, who wants to remain anonymous, said: “Customers are already being faced with serious premium hikes so a hike in the finance rates when Bank Base Rate remains unchanged won’t go down well and is going to be a difficult message to deliver. What makes me angry though is the lack of credible justification given for the increase.  It is the finance company’s prerogative to increase rates, but I for one will be looking elsewhere in future for a better rate from a finance provider that can give me and my customers more certainty and control”. 

Embrace change and prosper - Ravi Takhar

Embrace change and prosper!

The FCA is taking a very dim view of car finance brokers adding a gross rate to a finance company’s net rate.  This is because the borrower could be getting a different rate from the same lender when it goes to two different car finance brokers.  With the FCA’s attention firmly on commission disclosure under the long-awaited Insurance Distribution Directive, it’s not a stretch to see how the same scenario would apply to insurance brokers.

Responses to the FCA’s consultation document on the Directive must be submitted by 6th June. Whilst mandatory commission disclosure is not currently being called for, a new rule will require parties “to act honestly, fairly and professionally in the best interests of their customers” and intermediaries will also have to explain the “nature and basis” of their remuneration.

Most brokers currently add a gross commission rate onto the premium finance company’s net rate as standard practice, and rates differ between brokers. Given the recent experience in the motor intermediary finance market, would the FCA deem this unfair for the consumer?  What might the changes be and if gross rate commissions are banned what impact will it have on brokers?  Given that it isn’t uncommon for 50% of brokers’ pre-tax profits to come from finance arrangements today, such a ban on commissions earned from premium finance arrangements alone could pose a serious threat to brokers’ income. 

The pressures on brokers are mounting – both from rising costs and increased regulation.  Rising IPT and FSCS levies, the Discount Rate, the threat to the broker market from Fintech and aggregators…it all eats away at brokers’ profitability, and there’s only so much that commissions can be tweaked to compensate.

If the FCA bans or restricts gross rate commissions on finance arrangements, brokers will need to claw back that income elsewhere; to look creatively at bespoke finance agreements and bringing the function in-house and cut out the middle man!  This might sound like a leap but bringing premium finance in-house will give brokers back control over how the finance is structured and give them a bigger slice of the pie

The FCA is quite rightly keen that brokers justify the commission they make on finance.  Providing their own premium finance facilities will mean brokers have access to all the MI and justification they need to charge appropriate fees and interest for providing their facility. Brokers can therefore protect their income from premium finance business.  This is just one way that additional income could be legitimately and transparently earned.

Bexhill believes in transparency and fair commission but the problem comes with those few brokers who take advantage of the system.  The FCA will quite rightly put a stop to eye watering over inflated commissions, but for the majority of brokers who will lose income from quite legitimate gross commissions charged, be reassured - there are other ways to earn that income – whether that’s through value added products or in better, smarter ways of working with ancillary services, including premium finance. 

The changes being introduced by the FCA on commissions are just one of the many challenges that brokers are facing today. We are entering a brave new world and brokers are having to adapt and evolve in so many ways to stay relevant, so embrace change and prosper.

Expert View - Ravi Takhar

Premium Finance Funding Offers An Opportunity

A question on the lips of a number of insurance brokers is whether they should self-fund their premium finance rather than rely on third-party providers.

We have been advising insurance brokers on premium finance self-funding since 2002 and with our support more than 100 UK insurance brokers now own and operate their own premium finance business. Some of the largest insurance brokers in the UK have been self-funding their clients for years.

In today’s market everybody seems to be lending: peer-to-peer lenders allow grandmothers in Bolton to lend to secretaries in London. The question is why aren’t more brokers lending to their clients?

We have proven data that shows that any insurance broker that sets up its own in-house premium finance company can become self-funding within one to five years. Self-funding means having all the cash required to finance all your clients without relying on a third-party funding provider.

There are several reasons why brokers might consider setting up an in-house premium finance facility.

First, the FCA is becoming increasingly focused and concerned about the commissions brokers are making from the add-on premium finance product.

Some brokers only make a modest commission, but we understand that even rates of 1% are being questioned by the FCA. But other brokers earn a far greater commission, which in many cases dwarf the net rate provided by third-party funders. These commissions are not sustainable. By contrast, a lending rate charged by a finance company is not a commission and therefore as long as it is below the High Cost Credit Rate (currently 100% APR), it is deemed to be more of an appropriate reward for the risk taken.

Secondly, brokers are more concerned with maintaining control of the customer journey. Using a third-party finance provider is a break in the journey outside the broker’s control. Many brokers want to retain this control and ensure high quality service to their clients by controlling financing and charges for mid-term adjustments, failed direct debits and arrears letters.

Thirdly, brokers wish to maximise the return on any cash equity they have accumulated.

Brokers need to weigh the benefits of simply broking their finance business to a third-party lender and lending to their own clients. There are benefits to each model, but as the banks continue to offer little or no return for deposits, brokers like everybody else in the market are looking for better returns on their hard-earned cash.

Ravi Takhar founded Bexhill UK in 2002 and has more than 25 years’ experience in the acquisition, growth, financing and disposal of financial businesses. Prior to creating the group, Takhar was head of financial services investment at Japanese investment bank Nikko, from 1998 to 2002.

 

How hidden charges sting the broker - Featured in the Insurance Age

piggy-bank-drowning

 

 

 

Bexhill UK’s Alan Atkins argues that cheaper is not always better when it comes to premium finance.

Transparency is clearly vital when arranging premium finance for clients, but are all premium finance providers as transparent in their dealings with brokers?

Are brokers aware how their commissions are calculated and are they getting a fair slice of the pie?

The headline rate is one thing, but the way in which some providers present their terms can mean that, in reality, there are a number of ways in which brokers' commission is eroded.

 

The first are minimum service charges; these are applied when the interest charge on the annual premium doesn't make the required return for the provider so the payments are increased. When average premiums are low and the minimum service charge is high, this can have a considerable effect on a broker's override commission earnings. Is this fair?

Arrears
Secondly, if a client paying by debit or credit cards goes into arrears many premium finance providers will deduct a percentage of your commission from the expected earnings for the months the client was in default. Why should brokers be penalised for this?

Eroding commissions in this way is essentially heaping hidden fees and charges onto brokers that, based on a personal lines book of business of say £12m GWP per annum and £7m of premium finance, could easily amount to more than £10k in lost commission based on say 25% of the book defaulting for one month.

This is also based on a variable commission rate; if brokers apply a high sell out rate this could of course be a lot more.

Breakdown
Thirdly, brokers should check how their override commission is paid and that there is full transparency month by month showing a breakdown of the commission earned from each policy.

This information should be easily available. All too often brokers are not offered a monthly breakdown, which if they were, would highlight the above issues and ‘eroded' commissions. This is at best lazy and at worst non-compliant.

Premium finance providers have a duty to be transparent with brokers. Brokers should be able to see exactly what they are signing up for by way of working premium examples and standard documentation showing fees and charges too in order to make an informed choice.

Brokers also need to be wary of Long Term Trading Agreements. Whilst a low rate in exchange for a long-term lock-in might look attractive on the face of it, it also means that they can't shop around for providers sometimes for a number of years.

When it comes to premium finance, it seems that cheaper is not always better.

Original article can be viewed here http://www.insuranceage.co.uk/insurance-age/opinion/2479358/how-hidden-charges-sting-the-broker