Guaranteed asset protection (GAP) covers the ‘gap’ between the write-off value of a car that motor insurance will pay out, and the amount that a customer may owe under any motor finance agreement. It can be purchased on a standalone basis, often over the internet, or may be sold by car dealers at the time of the vehicle purchase.
These products have already been subject to regulatory scrutiny in the past. In 2014, the FCA introduced [PDF] a mandatory two-day delay between providing a customer with information about GAP insurance and finalising the contract.
Why is the FCA acting now?
The FCA has been collecting value measures data on a range of insurance products, including GAP insurance, since July 2021. In September 2023 it published its first complete year of data. This identified a number of concerns about the level of value being offered by GAP insurance, and the FCA therefore warned insurers that they had three months to improve the value offered by these products.
The FCA’s particular concerns related to the value of claims payments compared to premium income, and the amount of commission paid to distributors. The value measures data showed that only 6% of the total amount customers pay in premiums for GAP insurance is then paid out in claims. This compares to 65% for motor insurance. The FCA also claims to have seen examples of some firms paying 70% of premiums as commission to third parties involved in the sale of GAP policies.
The FCA's approach
The FCA states that multiple GAP insurance providers have "agreed" to pause sales. These firms have entered into agreements with the FCA, ensuring that they will not sell any more GAP insurance policies until they have made improvements to the level of value offered by their products.
Given the regulatory background, and the FCA’s power under FSMA to compel firms to take such action if they do not do so voluntarily, one could speculate as to exactly how freely this agreement was given. Regardless, the firms involved reportedly account for 80% of the GAP market, making this a substantial intervention.
In addition to the firms involved in the above actions, the FCA states that it is also planning a second phase of engagement with the rest of the GAP market. These firms have agreed not to take in any new distributors until this work is complete.
What does this mean for firms?
Sheldon Mills, FCA Executive Director of Consumers and Competition, highlighted that providing fair value to customers is an expectation of the FCA under the Consumer Duty. Therefore, while this initial action relates to GAP insurance, all financial services firms should pay attention to its implications – this heightened level of scrutiny will not begin and end with GAP insurance. A number of other products including excess protection and other add-ons continue to attract scrutiny from FCA Supervision teams. Given the regulator’s previous pronouncements about Consumer Duty representing a “paradigm shift”, this does not come as a surprise.
The background of warning firms to improve their own fair value work, highlights a degree of dissatisfaction on the FCA’s part with the depth, quality and/or effectiveness of firms’ own assessments in this area. Firms should consider their current approach to fair value assessments, and ask themselves whether or not they are really challenging their products robustly enough. Assessments that routinely fail to result in material changes to products are unlikely to satisfy the regulator, unless these can be backed up by extensive and compelling evidence.
In terms of GAP specifically, it seems clear that the FCA expect to see claims payments as a proportion of premiums increasing. Claims acceptance rates are already in excess of 95%, so in practical terms this means that total premiums need to decrease.
This is most likely to manifest itself as pressure for distributor commissions begins to come down. After the recent FCA intervention in the motor finance space, this is already the second major regulatory initiative in motor-trade adjacent financial services products this year. Motor trade distributors and their product providers may wish to bear this increasing regulatory attention in mind as part of any future planning, particularly if seeking alternative revenue streams to replace potential lost commission income.
While there has so far not been any public mention of backwards-looking redress for customers who have held GAP products in the past, the PROD rules do require firms to consider whether this is necessary when they identify products that have not offered fair value. Firms must therefore be alert to this possibility when undertaking their reviews, and remember that, if necessary, redress exercises are almost always less painful when undertaken on a firm’s own terms rather than under the direction of the regulator.
If the FCA continues to identify evidence of poor value in the insurance sector, and remains dissatisfied with the quality of fair value assessments being performed by firms, its appetite to use its regulatory toolkit to compel firms to undertake wide-reaching past business reviews is likely to increase. Such actions will probably begin in the product sectors, that have already been under scrutiny. However, it is likely to rapidly spread as the FCA continues to scrutinise fair value assessments across all financial services products.
For more insight and guidance, get in touch with Blandine Arzur-Kean.
