A crackdown on soaring insurance prices has intensified after the City regulator started a review into lending schemes used by millions of people to pay for motor and home cover in instalments.

The Financial Conduct Authority said on Wednesday that it would scrutinise the premium finance market because it was worried that consumers are being ripped off. The inquiry was announced on the same day that the government revealed it was setting up a separate industry taskforce to tackle the “spiralling” cost of motor cover, hitting shares in the leading sellers of car insurance. Direct Line and Admiral, which both also make money from premium finance, closed down 6p, or 3.2 per cent, to 176½p and 62p, or 2.2 per cent, to £27.14 respectively.

Car insurance prices have surged since early 2022, fuelling concerns among politicians and consumer rights groups that some households cannot afford an essential service. The cost of premium finance, which allows consumers to pay for insurance in instalments rather than in a lump sum upfront, has also been criticised by campaigners as a “poverty premium”.

The regulator estimates that more than 20 million people use premium finance. Many of these customers are in financial stress, according to the regulator, and face high charges to access this form of credit. Research by the FCA found that 79 per cent of adults in financial trouble had used premium finance.

“With the average yearly rate on the amount of money borrowed ranging from 20 per cent to 30 per cent, the FCA is concerned that premium finance may not be providing fair value,” the authority cautioned. It will report back on its findings and any action it plans to take during the first half of next year.

The regulator’s premium finance review was welcomed by Which?, the consumer group, which said the inquiry “must lead to action that ends this unjust ‘tax on being poor’ for motorists”. The group also welcomed the government’s new insurance taskforce, warning that the cost of car cover had reached “eye-watering levels”.

The average motor insurance premium was £622 in the three months to the end of June, up 21 per cent compared with a year earlier and not far off the record £635 reached in the first quarter, according to data compiled by the Association of British Insurers.

Insurers have lifted premiums because the cost of handling motor claims has jumped, pushed higher by the rising cost of second-hand cars and spare parts, as well as higher wages in repair shops and supply chain bottlenecks that have meant fixing vehicles takes longer. Yet the industry has also faced criticism that it is profiteering, claims that insurers have rejected.

Even so, Labour promised in its manifesto that it would tackle rising car insurance premiums and the government said its new taskforce was part of this pledge. The initiative involves Which?, the ABI, Citizens Advice and the FCA and will agree measures to keep a lid on insurance costs.

Louise Haigh, the transport secretary, said: “Car insurance is an essential, not a luxury. It is vital to accessing economic opportunities and this government is committed to getting costs under control. That’s why we’re taking direct action to bring insurance companies and regulators round the table to discuss how we can crack down on spiralling costs.”

The FCA’s review into premium finance is a further blow to Close Brothers, the merchant bank that has suffered a halving of its share price this year after the regulator started a separate inquiry into loans for car purchases. Close Brothers has big exposure to both areas, with premium finance accounting for about £1 billion of its £10.1 billion loan book at the end of July, and motor finance some £2 billion. Shares in the bank closed down 4½p, or 1.2 per cent, at 384p.