The Financial Conduct Authority (FCA) has taken decisive action against the sale of Guaranteed Asset Protection (GAP) insurance by reaching an agreement with insurers to halt sales temporarily, a decision that affects firms representing 80% of the market share for GAP insurance.
GAP insurance, often sold with car finance deals, is designed to cover the financial gap between the purchase price of a vehicle (or the outstanding finance amount) and its market value at the time of loss.
The FCA, however, has raised concerns over the product’s value to consumers, prompting a re-evaluation of its fairness and effectiveness.
In response to these concerns, the regulator initiated a review, requesting GAP insurance providers demonstrate the value of their products to consumers. The findings were less than satisfactory, leading to the current pause in sales.
The involved firms have committed to revising their GAP insurance offerings to ensure they align with FCA standards, aiming to enhance customer value.
This development also comes after the FCA’s fair value measures data revealed that only a small fraction of GAP insurance premiums — 6% — is returned to consumers in the form of claims payouts. Additionally, the FCA highlighted instances where up to 70% of premium income was allocated to commission payments, further questioning the product’s value proposition.
Sheldon Mills, the FCA’s executive director of consumers and competition, has endorsed the sales pause, emphasising the need for improved value in GAP insurance products.
“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,” Mills said. “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’s scrutiny extends to all distribution channels of GAP insurance, demanding comprehensive changes to product design and sales practices. The regulator is open to considering proposals for modifications across different sales channels, acknowledging that some may implement the required changes more swiftly than others.
This regulatory intervention also underscores the FCA’s commitment to enforcing Consumer Duty principles, which mandate that firms must offer fair value, ensure products and services are suited to consumers’ needs, and provide high-quality customer service.
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