Most GAP Insurance Sales on Pause, As FCA Considers Next Move

A day of reckoning has been widely predicted across the insurance sector after the FCA announced it was taking stock of the interest rates applicable on car leasing and other car finance options.

The feeling is that compensation may be on the way for most of those drivers who borrowed, or took out lease plans at high interest rates in the past. This was especially true on used car finance packages, offered to those with lower credit scores, who were also tenants rather than mortgage holders. The concept that being a tenant in itself is a credit risk, when the majority of people in the UK are renters, not property owners, may well be challenged successfully very soon.

You can’t really argue that credit scores are somehow individually assessed, then apply some type of broad sweep statistic that places people in a grouping of millions. It would be like saying all muslims, Sikhs or persons from African heritage, were higher credit risks because the group data showed that in certain default circumstances – and that of course would be blatant discrimination.

So the same regulatory medicine on finance deals and credit scoring may be spooned out to insurers later this year, as the FCA looks at the rates offered on 12 month installment plans for car cover. Some of these are as much as 40% APR, for the privilege of paying car premiums over 10 or 12 months. Are they fair value for the consumer? Then there are MTA fees and cancellation fees of around £30-£50, which may seem excessive when the consumer is actually carrying out the admin online. Let’s wait and see.

In the meantime the latest news is that most GAP insurance product sales have been suspended. That will be a blow to the motor trade seeking to shift used stock this spring.

Here’s the word;

The Financial Conduct Authority (FCA) has today announced that multiple insurance firms have agreed to pause sales of Guaranteed Asset Protection (GAP) insurance, following a request from the FCA. The firms which have agreed to this action account for 80% of the GAP market. 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. 

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 FCA is concerned that the product is failing to provide fair value to some consumers.  

In September, the FCA wrote to firms manufacturing GAP insurance products asking them to take immediate action to prove customers are getting a fair deal. After assessing the responses to this request, the FCA was not satisfied and, as a result, has agreed this pause in sales with these firms. As part of this agreement, they have committed to make changes to their GAP products to provide better value for customers, in line with FCA rules.  

This action follows findings in the FCA’s latest fair value measures data, which shows that only 6% of the amount customers pay in premiums for GAP insurance is paid out in claims. The FCA has seen examples of some firms paying out 70% of the value of insurance premiums in commission to parties involved in selling GAP policies. 

Sheldon Mills, Executive Director of Consumers and Competition, said: