The Financial Conduct Authority (FCA)
has today announced that multiple insurance firms
have agreed to pause sales of Guaranteed Asset Protection (GAP)
insurance, following a request from the
FCA.
The firms which have agreed to this
action account for 80% of the GAP market.
The regulator will carry out a second
tranche of engagement with the rest of the GAP market, with
the aim of improving the value of the product across all firms.
These firms have agreed not to use new distributors of GAP
in the interim.
GAP insurance is typically sold
alongside car finance. It covers the difference between
a vehicle’s purchase price or outstanding finance and
its current market value, in the event it is written off before
finance has been repaid.
The FCA is concerned that the product
is failing to provide fair value
to some consumers.
In September, the FCA wrote to firms
manufacturing GAP insurance products asking them to take
immediate action to prove customers are getting a fair
deal.
After assessing the responses to this
request, the FCA was not satisfied and,
as a result, has agreed this pause in
sales with these firms. As part of this
agreement, they have committed to make changes to their GAP
products to provide better value for customers, in line with FCA
rules.
This action follows findings in the
FCA’s latest fair value measures data, which shows that only
6% of the amount customers pay in premiums for GAP insurance is
paid out in claims. The FCA has seen examples of some firms
paying out 70% of the value of insurance premiums in commission
to parties involved in selling GAP policies.
Sheldon Mills, Executive
Director of Consumers and
Competition, said:
“I welcome the agreement by firms
providing GAP insurance to pause sales while they work on
improving value for customers.
“GAP insurance can provide a useful
service to customers, but in its current form it does not offer
fair value and we want to see
improvements.
“We will continue to work closely with
firms as we carry out further engagement to resolve these issues
and ensure customers are getting fair value products that meet
their needs.”
The FCA has identified concerns with
the design of GAP insurance across all distribution channels and
is requiring firms to make
changes.
The regulator will consider firms’
proposals for different distribution channels, and recognises
that some channels may be able to address these concerns more
quickly.
Under the Consumer Duty, firms
must provide fair value to customers, ensure that
products and services meet their needs,
and provide good customer
service.
Notes to
editors
-
In September, the FCA warned
GAP insurers over the value offered by this insurance product
and that it was unlikely to be providing fair value to
customers in line with our
rules.
-
The FCA carried out significant work
in the past aimed at addressing issues with GAP insurance,
including a market study on insurance add-ons and
introducing new
rules specifically
for GAP insurance.
-
The FCA’s assessment of the value
provided by GAP insurance includes data going back to 2008. In
our 2014 market study, we found that only 10% of premiums were
paid out in claims, on average, between
2008-2012.
-
Since then, the FCA
has introduced
rules strengthening
how insurance firms should assess whether their products are
providing fair value.
-
GAP insurance provides cover for a
financial shortfall that can happen
when:
-
a customer’s vehicle is written
off or stolen;
-
the motor insurance pay-out does
not pay back its original value at purchase or the
remaining finance value (if the vehicle was bought on
finance)
-
You can view the
FCA’s latest Value Measures Data.
-
In addition to its loyalty premium
ban for home and motor insurance in 2021, the FCA also
tightened up its rules to make sure products were providing
fair value.
