GAP Insurance – What is the current state of affairs?

On 9^th February 2024, the Financial Conduct Authority (FCA) announced that multiple insurance firms have agreed to pause sales of Guaranteed Asset Protection (GAP) insurance, following a request from the FCA. 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 firms that have agreed to this action account for almost 80% of the GAP market and 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.

What is the concern?

In July 2023, the FCA implemented its Consumer Duty initiative to ensure Consumers get a ‘fair deal’ from the products/services they purchase. Two months after the Consumer Duty rules were implemented, the FCA issued a statement to insurers informing them that they had three months to prove their products meet the standards expected. The FCA was concerned that GAP insurance was failing to provide fair value to some consumers and firms were instructed to take immediate action to prove customers are getting a ‘fair deal’.

Now, after assessing firms’ responses to this request, the FCA was not satisfied and as a result, agreed this pause in sales with these firms. As part of this agreement, firms have committed to make changes to their GAP products to provide better value for customers, in line with FCA rules.

Sheldon Mills, the FCA's 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.'

What does this all mean?

Data from the FCA showed that in 2022, there were more than 1.8m stand-alone GAP policies and over 567,000 add-on policies in place. While these policies will still be valid, it will be very difficult to purchase new policies until the FCA have completed their review of the market.

Needless to say, this has caused car dealers and insurers some issues and it has been reported that some insurance providers claim the FCA is in danger of putting consumers in vulnerable positions as a result of the action.

Insurers are worried with no cover available to car buyers, they could be left ‘out of pocket’ in the event of an accident. While the FCA believes GAP insurance can provide a useful service to customers, it feels that in its current form, it does not offer fair value to customers. This is mainly due to the high commissions from the sale of the products – sometimes as much as 50% - which the FCA feel is not good value.

As a result, insurers and car dealers have interpreted the move to review GAP insurance as a ‘ban’ on selling the product and will it for fear of retrospective or remedial action being taken against them.

Going forward then…

Despite the pessimist, there is a possibility that the product could be resold after the review has been completed.

However, after speaking to contacts in the car dealer industry, it would appear that some are worried that it might be used to criticise the industry and could just stop selling it in the future regardless of the FCA findings.

As previously stated, the FCA does not have an issue with GAP, they have an issue with the high commissions paid to the Dealers when it is sold. The FCA wants to be assured that:

1) GAP does offer fair value, and

2) the dealers are not overly incentivised to sell it.

Ultimately this is a good development: the results of the review will lead to greater clarity on what firms can and cannot do and it is likely that a ‘good practice’ guide will be developed for the sale of GAP insurance.