Car dealers selling GAP insurance have until September 1 to ensure new add-on sales' rules are applied.
These include having to provide customers with information to help them shop around and introduce a deferral period in all cases.
The product cannot be introduced and sold on the same day.
The Financial Conduct Authority this week released the final findings on the general insurance market study on GAP sale competition, together with rules.
It is standing by its September 1 deadline the new rules have to come into force despite some objecting in the proceeding consultation period this didn’t give the industry enough time to implement them.
Key points in the FCA's competition remedy
Deferral period: four days for new and used vehicles
The FCA considers the proposal of four days in total, including the option to conclude the day after (the start of the deferral period) for customer-initiated sales, should be sufficient and “strikes the right balance”.
This deferral period cannot be waived even if a customer immediately purchases GAP after being given the prescribed information. The FCA added repeat customers “can also benefit from shopping around” at this stage.
The prescribed information must include information on how the deferred opt-in works, including the date the prescribed information was provided.
This remains as the FCA has previously proposed:
1. total premium of the add-on GAP policy
2. significant features and benefits, exclusions or limitations and cross-references to relevant policy document provisions
3. that GAP insurance is sold by other distributors
4. whether the policy is optional
5. when the policy can be concluded by the firm, “including the date on which the prescribed information was provided so that it is clear to the customer when the ‘clock’ started”.
GAP insurance on credit
The new rules are not incompatible with the Consumer Credit Sourcebook (CONC) or Consumer Credit Act and as such do not prevent consumers buying GAP on credit, despite opposition that two credit checks would be needed.
On the opposition to the in-force date of September 1, the FCA said that since it had been told 22% of vehicle sales took place in this month in 2014, “it is important that the remedy should apply from September, so that the increased number of customers purchasing vehicles will benefit from the remedy”.
The FCA has upped its cost estimate from £5m to £20m, said by the FCA to be within a “reasonable range and do not change our conclusion that the policy generates significant and ongoing net benefits for consumers”, estimated at £31m to £54m annually.
Monitoring of GAP sales' volumes
The FCA expects firms to set their own tolerances and expectations about what would be high levels of sales and what would trigger a review ie if a dealership or staff member’s sales were “outside the normal range”.
The FCA’s ‘GAP: competition remedy’ statement concludes: “We expect to see better consumer outcomes from more informed purchasing decisions and improved competition between add-on and standalone distribution channel, countering a “point-of-sales advantage” for dealers and the lack of transparency. This had led to consumers getting “poor value” from add-on products and stand-alone purchases.
In its market study the FCA found that:
- Almost two-thirds of add-on customers (59%) reported not having thought about buying GAP insurance until the day they bought it
- Add-on GAP insurance customers had a worse understanding of the product than standalone GAP insurance purchasers
- Almost half of customers reported being unaware that they could have bought GAP insurance other than at the point of sale. Add-on GAP insurance customers were the least likely to shop around relative to purchasers of the other four sampled (add-on) products in the FCA’s market study (only 19% of respondents said they did)
- Shopping around is likely to be “particularly worthwhile”. Add-on GAP insurance prices can be significantly higher than stand-alone prices. Furthermore, the stand-alone share of the market is very small in comparison with add-on GAP sales, which further underlines the advantage held by add-on distributors
- FCA evidence suggests that GAP insurance sold as an add-on is often poor value for customers, with only 10% of retail premiums for add-on GAP insurance being paid out in claims. This is a very low claims ratio relative to other products.
The respondents to the FCA consultation on GAP add-on sales included Car Care Plan, Close Brothers, the Finance and Leasing Association, Inchcape Retail, Mapfre Abraxas, Mondial Assistance (UK), the National Franchised Dealers Association and The Warranty Group.
The National Franchised Dealers Association has expressed its disappointment at the rulings.
"The FCA has turned a deaf ear to dealer concerns regarding changes to selling GAP insurance, despite extensive lobbying by the NFDA.
The Warranty Group’s divisional director Ciaron Whelan said: “The main point is that the FCA’s final announcements mean that we all now know exactly where we stand and our view is that GAP remains a very worthwhile product for almost all dealers and a valuable purchase for many, many car buyers.
“It is important to underline that, in our experience, the vast majority of dealers were already selling GAP in a responsible fashion, so they have little to make in the way of changes.
“The key adjustment is that dealers will need to ensure that they have a consumer focused solution. This means changing their GAP sales structure in order to meet the FCA’s desire to provide customers with a period of time during which they can consider the merits of purchasing the product.
“Really, the main impact will be that dealers will need to be able to provide clear retrospective evidence that they are adhering to the rules.”