HM Revenue and Customs (HMRC) is consulting on whether broker fees should come under the scope of Insurance Premium Tax (IPT) to prevent brokers moving away from a commission-based revenue model to a fee-based one that enables them to reduce the IPT liability.
Meanwhile the Financial Conduct Authority (FCA) would prefer to double down on unfair commission practices and encourage brokers to operate on a fee-from-clients basis.
We appear to have ourselves a bit of a conundrum.
From my own experience I’ve certainly noticed a rise in the practice of fees being added to general insurance (GI) sales by brokers.
The problem with adding fees to a policy is how do brokers collect their money if the customer wants to pay by direct debit?
An insurer won’t normally allow brokers to add a fee to the policy and then collect the direct debit from the customer inclusive of the fee.
Brokers therefore have two options – charge the customer an initial payment by credit or debit card and then let the customer make instalments by direct debit for the insurance policy, or wrap the entire premium and fees up in a premium finance agreement.
How can brokers justify this?
I am sure brokers adopting such practices would argue they are not doing anything wrong and that they make it all very clear in their terms of business.
But is this the best solution for the customer? Is it treating customers fairly and are brokers being remunerated in ways that conflict with the customer’s best interests?
The FCA has been taking a hard line on unfair practices so why is HMRC looking at this issue more closely than the regulator?
To give you a typical working example: If an insurance premium is quoted by the product provider at £300 inclusive of IPT and they offer the ability to pay the premium by instalments at no extra charge, the customer would pay £25 per month.
The broker would earn 25 per cent commission making their earning from the sale £66.96.
But, if the broker wraps this policy into a premium finance contract the additional fees and commission could increase their earning to as much as £120.30 including the commission plus £35 arrangement fee and five per cent commission from premium finance provider.
However, despite the customer paying more – £366.82, based on an average 9.5 per cent premium finance interest – the IPT remains the same. No wonder HMRC is paying attention.
My point is that regardless of the loss of IPT revenue, I’m not sure how any broker can justify such an approach when they have the ability to provide instalments interest-free.
So what to do?
As a GI provider I believe that great service is not delivered for free.
Brokers should be paid a fair commission and trail and should not be forced to charge fees on top of the premium to cover their costs.
However, brokers should not be inflating the price the customer pays just to get their remuneration higher or upfront.
Furthermore, is it right that the customer does not get the fee refunded if they decide to cancel their premium inside the statutory cooling off period?
And do not get me started on the fees for cancelling or making changes to policies. That’s one for another day.