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By Martin Coppack, Director, Fair By Design

It’s not every day that we see the financial services market reacting so strongly to what the regulator says on a relatively “niche” area, but one that affects many people: premium finance.

Premium finance is the loan and interest that insurance providers charge you if you can’t afford to pay for your car insurance all in one go, and pay monthly instead. It’s also used with other financial products.

Authority (FCA) is sending strong signals that it will tackle premium finance, with its Director of General Insurance Matthew Brewis effectively calling it a poverty premium this week:

“It is a tax on being poor. Those who are paying monthly are subsidising those who can afford to pay annually.”

It’s not the first time that Matthew Brewis has talked about the need for action on premium finance being used to charge people more for paying monthly. When we launched our latest report on insurance poverty premiums with the Social Market Foundation (SMF) last spring, Matthew said that the FCA had been engaging CEOs on premium finance. He said that the FCA expected the prices charged for paying monthly to be proportionate with the credit risk for the cost of providing that service. Matthew questioned why some consumers experienced such high rates, saying it was not “really apparent why’s it’s appropriate for APRs at 30% or above charged to consumers”. You can watch him here:


The Association of British Insurers, in turn, said they agreed on the need to collaborate with Treasury and the FCA on some of the issues identified in our report. 

The Shadow City Minister Tulip Siddiqi MP spoke at the same launch event and agreed action was urgently needed. Tulip pledged to make the case for any incoming Labour Government to prioritise tackling how expensive it is for people on low incomes who pay monthly for their insurance: “Too often it’s just more expensive to be poor, which is not how we want the country to be run”.   

What is the impact of premium finance on people on low incomes?

Our latest research with the SMF shows that over half of people in poverty are finding it difficult to pay for their insurance during the cost-of-living crisis – leading some to give up insurance as they prioritise food and energy bills.  

This research described how paying monthly for car insurance can cost £160 more a year than paying everything upfront. These extra costs have a knock-on effect on take-up amongst people on low incomes. Zahada, who has lived experience of this issue, explains how she had to pay monthly for her daughter’s car insurance because they didn’t have all the money to pay upfront. That has cost them an extra 10%, or around £200. You can hear directly from her in this video: 

We want to see action 

We have an opportunity to end this poverty premium for good. There are strong signals from the regulator and, we believe, increasing willingness from industry to collaborate. In an election year, we are calling for political parties to make addressing the poverty premium part of their commitments. We want to see a UK where everyone pays a fair price for essential services and where it doesn’t cost more to be poor. 

The blog below was initially posted on the APPG (All Party Parliamentary Group) on Poverty website. It’s written by Alicia Vernalls, who is an Ambassador for Fair by Design as well as a Commissioner of the Birmingham Poverty Truth Commission.

What is the difference between a single parent starving themselves to feed their children, an elderly person unable to get out of bed because they can’t afford to heat their home and a person developing a mental health condition due to debt crisis? The answer is “absolutely nothing”, if you think about it in financial terms.

I didn’t know until I started campaigning for change that it costs more to be poor! Many services and products that are essential to daily living have extra charges attached, and premiums are paid by people struggling to make ends meet that mean they find it even harder to survive. The list below is just a few of the ‘poverty premiums’ encountered:

  • Energy tariffs
  • Prepayment meters
  • Paying for insurance in instalments
  • Higher insurance policy prices
  • Convenience shopping
  • High-cost short-term credit (e.g. payday loans)
  • Travel costs
  • Life emergencies (e.g parking at hospital, prescription charges)

These premiums are something I had been unaware of throughout the eternal money struggles of my daily life.

The everyday costs of the Poverty Premium

It was a foregone conclusion that council housing had prepayment meters for electricity and gas. Of course, I wasn’t allowed an overdraft or credit card – they were for people far better off than me, the “normal” people. Contents insurance was a luxury, but I hadn’t got anything worth stealing anyway! That being said, the policy payments would have been high as we always were always housed in “high-risk” areas. The only way I could afford anything half decent was using doorstep lenders and high cost credit like shopping through rent to own lenders.  The problem? 47% interest.

What could make life easier?

Obviously more money. Despite working at every opportunity I could, and not wanting to rely on handouts, insufficient benefits payments and poverty wages are the reason so many people find themselves living in poverty in the first place. However, an eradication of those Poverty Premiums would have made my money go further, maybe help to make ends meet. An average amount of £490 per year could be saved for low income households if such premiums didn’t exist.

Payday lenders, rent-to-own retailers and credit repair credit cards could reduce or eradicate high interest charges. Energy companies that rely on loyalty, need and not always best practice, coin in huge profits off standing charges and high-priced tariffs. Reducing their charges in line with direct debit customers and realising that one size does not fit all would go a long way to helping.

Social housing making use of furnishings left by previous tenants could stem the need to use payday loans, rent-to-own and doorstep lenders, leaving more available funds to prevent tenants getting into rent arrears. The regulation of high cost lenders by capping interest rates will definitely help the extraordinarily high use by struggling households.

How would you feel?

Just take a minute to calculate what you class as the necessities and daily spending that cannot be avoided in your life. How would you pay for them if your existing finances were not available? Would you be outraged at the hidden costs you would be forced to pay?

Let’s get the message out there to the people, businesses, housing companies, government, industry and regulators.

Alicia Vernalls

The following blog was written by Fair by Design’s Director, Lucie Russell  for the APPG on Poverty.  It highlights how residents on a social housing estate in East London are paying over the odds for their energy through pay as you go prepayment meters.   Our thanks to Michelle Edwards LittleLaw  for bringing this to our attention.

The Poverty Premium can sometimes come over as an ethereal concept, so it’s the concrete examples that really bring it alive. These are the ones where it’s clear that the people impacted are being driven into yet more poverty because of it.  The way the Poverty Premium impacts on them is clearly an injustice. These concerns hit me squarely when reading the February 2019 column by Michelle Edwards in independent local newspaper, the Waltham Forest Echo. Edwards is a campaigning journalist and a Marlowe Road Estate resident in the London Borough of Waltham Forest. Her piece on the newly completed affordable housing block on the estate as part of its regeneration programme raises a particular concern for those residents in relation to their energy provision.

Energy costs for people in poverty are the biggest driver of the Premium, so when we saw her piece we thought it was really important to highlight it as a part of our involvement in the APPG on Poverty Inquiry into the Poverty Premium.

Edwards told me “All the new and existing tenants moved into the block as part of the regeneration development were given an eleven-page Residential Heat Supply Agreement for their heating and hot water.” The dictated terms in the Agreement for their method of payment is a pay-as-you-go prepayment meter. In her words, “Having a prepayment meter almost always means paying more than you need to for energy bills. Not only is the unit price for energy more expensive with a prepayment meter, but the cheapest tariffs offered by energy suppliers are usually not made available for prepayment customers. The council may at its own discretion vary the energy tariff rates for the supply of energy at any time. As it stands, the meter is the only option available to residents”.

According to the piece, payments for the prepayment meter are managed by a third party called EEMonitor. Of the residents she spoke with each had reported problems with their meter. “Apparently the top-ups disappear at an astonishing rate.” One tenant told her he moved in on 12th December 2018 to find his meter was already showing a reading of minus £5. Apparently, the construction workers had left the heating on. Up to 20 January, the tenant had put £60 on the meter.  As a disabled occupant he can only afford to turn his heating on for one hour a day. In another of her examples for a similar period, a household had spent £70. The children of that household were told to cut down their showers and only turn the heating on when absolutely necessary. A third resident she met required consoling in the foyer. His mother has a medical condition that affects her bones. In order to keep warm, she has to stand up against the radiator.

This is the stark reality of how people are being locked into extra charges for their energy. There are many more across the UK. There must be a better way to support poor and vulnerable communities to enable them to make ends meet rather than locking them into yet more hardship. We hope the APPG on Poverty Inquiry into the Poverty Premium report makes a real difference to those on the ground who, like the Marlowe Road residents, are struggling to keep their heads above water. It’s time for action.

Lucie Russell

Fair by Design is a movement dedicated to reshaping essential services, like energy, finance and insurance, so they don’t cost more if you’re poor.  People in poverty pay more for energy, finance and insurance than those on higher incomes.  This is the Poverty Premium.