The Financial Conduct Authority (FCA) has issued a directive compelling several key insurance firms, constituting 80% of the Guaranteed Asset Protection (GAP) insurance market, to suspend the sale of GAP insurance voluntarily, the City regulator said in a press release.
This move comes as the FCA seeks to engage in a comprehensive review of the product’s value proposition, with a commitment from the participating firms to reassess and enhance their GAP offerings.
The participating insurers, in compliance with the FCA’s directive, have agreed not to involve new distributors for GAP insurance during this suspension period.
GAP insurance, commonly bundled with car finance, provides coverage for the discrepancy between a vehicle’s purchase price or outstanding finance and its current market value in the event of a write-off before the completion of finance repayment.
The FCA, expressing apprehensions about the fairness of the product to consumers, initiated this directive following outreach to firms manufacturing GAP insurance products in September.
The regulatory body’s assessment of the responses received prompted the agreement to suspend sales temporarily, with a commitment from the insurers to revamp their GAP products to align with FCA rules and deliver enhanced value for customers.
This decision follows revelations from the FCA’s latest fair value measures data, disclosing that a mere 6% of customer premiums paid for GAP insurance are disbursed in claims.
Notably, some firms have been found to allocate as much as 70% of insurance premiums in commission to entities involved in the sale of GAP policies.
Sheldon Mills, Executive Director of Consumers and Competition, emphasised the significance of the directive, stating, “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 affirmed the FCA’s commitment to collaborating with firms to address these issues and ensure customers receive fair value products that align with their needs.
Identifying concerns with the design of GAP insurance across all distribution channels, the FCA has mandated firms to institute changes. The regulatory body acknowledges that different distribution channels may address these concerns at varying paces and will consider firms’ proposals accordingly.
Under the Consumer Duty, firms are obligated to deliver fair value to customers, ensure products and services meet their needs, and provide exemplary customer service. The FCA said its directive reflects its dedication to upholding consumer interests and fostering a transparent and equitable insurance market.
