Final rules from FCA for add-on GAP insurance

For a long time, car dealers have been using add-ons such as GAP insurance as a means of enabling sales staff to earn commission. The FCA has now clamped down on this practice with new rules.

In March 2014 the Financial Conduct Authority (FCA) began a market study into the add-on sale of GAP insurance. Then, on 10^th June 2015 the FCA published a final policy statement of their market study into this, outlining the new rules that will apply to "firms distributing GAP insurance in connection with the sale of a motor vehicle (add-on) GAP."

The first of these is for the firm to provide customers with "prescribed information" to help them to shop around and make a more informed decision when purchasing GAP insurance.

The second is that firms must adhere to a four day deferral period. This means that add-on GAP insurance cannot be introduced and the sale of it concluded on the same day.

Independent GAP Insurance provider ALA believes that the new rules that come into effect on 1st September 2015 will greatly benefit consumers by making it easier for them to shop around for GAP insurance. Add-on GAP insurance premiums bought via car dealers are often significantly higher than stand-alone prices, for no tangible reason, and the amount paid out in claims compared to the premium paid for policies (claims ratio) makes add-on policies very poor value to the customer.

The FCA expects an ongoing cost benefit to consumers of an estimated £31-54 million per year.

The findings and proposals have been criticised, particularly regarding the difficulty the changes will present to dealers and that 1^st September is deemed by many to be too soon for firms to implement the changes. 

From then, before a GAP contract is concluded, a firm must draw to the customer’s attention the following information:

1. The total premium of the add-on GAP policy, separate from any other prices.
2. Significant features and benefits, significant and unusual exclusions or limitations, and cross-references to the relevant policy document provisions
3. The fact that standalone GAP contracts are sold by other distributors (whether or not the GAP contract is sold in connection with vehicle finance)
4. The duration of the policy
5. Whether the add-on GAP contract is optional or compulsory
6. When the add-on GAP contract can be concluded by the firm
7. The date the above information has been provided to the customer

This information must be communicated in a clear and accurate manner and in writing or another durable medium.

This list is in addition to the information that firms must provide under existing ICOBS requirements, including the customer’s right to cancel.

The new rules state that an add-onGAP contract cannot be concluded by a firm with a customer until at least 2 clear days have passed since the prescribed information has been provided. This amounts to a “four day” deferred opt-in period as originally planned.

The customer can initiate the conclusion of the contract faster; a day after the prescribed information has been given, if they choose to.

The FCA has stated that it has no intention to stifle innovation with these rules and does not want to push them into a specific format. It appears that dealers and finance companies will effectively be self-regulating the implementation of the new rules, so it remains to be seen whether there will be any positive impact on customers.