Insurance firms do not give consumers enough upfront information about hidden costs involved in paying for policies in instalments, the City watchdog has warned.
A lack of details to help people compare the difference between forking out the whole amount upfront or in monthly payments was among a raft of problems uncovered by the Financial Conduct Authority (FCA) in a review of the online home and car insurance market.
Paying monthly means choosing a high-interest loanRebecca Rutt, MoneySavingExpert
The FCA investigated information given by 13 insurers and 30 intermediaries including four price comparison websites and followed the customer journey up to the point where purchasers are required to input their payment details.
It found a number of cases where firms failed to provide a representative example setting out the interest rate, a representative annual percentage rate (APR) and the total amount payable. It said this was limiting a customer’s ability to make an informed choice about how to pay and in some cases meant people were not aware of the additional cost of choosing to pay by instalments.
Experts warned that many people did not realise that paying monthly for insurance was essentially the same as taking out a high-interest loan.
Linda Woodall, acting director of supervision at the FCA, said: “Consumers should expect clear information about the payment options available to them.
“Regardless of whether people choose to pay upfront or in instalments, it’s important that they can see exactly what they are signing up for and how much it costs so they can decide whether they are getting a fair deal.”
The FCA said it expects all firms to consider the findings of the review and take action where necessary. It is also following up with individual companies where it found specific examples of failings and poor practice.
The watchdog found that firms acting as a credit broker did not always disclose the name of the credit provider or details of their relationship with the firm, while in some cases it was not made clear that a fee would be charged at all. Other issues raised included how early in the transaction a customer was given full details of a proposed credit agreement.
Rebecca Rutt, senior insurance writer at MoneySavingExpert.com, said: “Paying monthly for car or home insurance means you’re effectively choosing a high-interest loan because along with paying for the insurance, you’re also paying for the interest added on by the insurer.
“Therefore, if you can, always pay it in full to avoid this. If you can’t afford such a big lump sum in one go, a credit card which charges 0 per cent for a minimum of 12 months will cut your costs.”
A spokeswoman for the Association of British Insurers said: “Insurers want to ensure that any premium finance options are clearly and fully set out as part of the sales process, so that customers know exactly how much they have to pay for their insurance.”
She added: “Our members will be carefully considering the findings of this FCA review to ensure that all motor and household insurance customers understand the cost of the different premium payment options.”