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Guest opinion: GAP Insurance, the new rules, what has it achieved?

Author: Steve Freeman, National head of motor, MacIntyre Hudson

As is no surprise the FCA released it’s final rules on the sale of ‘add-on’ GAP insurance last week. It’s initial concerns were that motor dealerships, and others providing GAP insurance at point of sale, had an unfair advantage over providers of ‘stand-alone’ gap insurance with their sales being made at point of sale of the vehicle. The paper released last week, (Guaranteed Asset Protection Insurance: competition remedy) aims to level this point of sale advantage and ensure the customer has all the information necessary to make an informed decision.

The decision to review and implement the new rules is as a result of the FCA market study into GAP insurance sales as below:

59% of add-on customers 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..

Like it or not the new rules must be adhered to from September 1st 2015, which doesn’t leave much time for point of sale firms and insurers to revise their business models to ensure compliance. The main points from the FCA’s final rules are:

Prescribed Information: The customer must be provided with the following ‘prescribed information’

The total premium of the add-on GAP insurance policy, separate from other prices
The significant features and benefits, significant and unusual exclusions or limitations, and cross references to the relevant policy document provisions
That GAP insurance is sold by other distributors
The duration of the GAP insurance policy
Whether the GAP insurance policy is optional
When the GAP insurance contract 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’ has started
This ‘prescribed information’ must be provided in writing or any ‘durable medium’ (as described in the FCA Handbook Glossary)
There is no specific format for how this information is to be presented
The information must be drawn to the customers full attention and it must be clearly identifiable as key information

4 Day Deferral Period: The introduction of a 4 day deferral period for both new and used vehicles, which begins when the ‘Prescribed Information’ has been provided to the customer. There is the option for the customer to initiate the conclusion of the sale the day after the deferral period begins. There is no ability for the customer to waive the deferral period in its entirety and purchase GAP on the same day.

Implementation Date: Despite significant challenge the FCA has ruled that the implementation date for the new rules will be September 1st 2015 as per the initial draft rules and consultation. Within this there are important factors to note:

All add-on GAP insurance contracts sold on or after September 1st 2015 must be sold in compliance with the new rules.
Where a firm has already begun discussing GAP insurance with a customer but will not conclude the sale until on or after September 1st 2015, this sale must also comply with the new rules.
The changes to the rules around the sale of add-on GAP insurance coincide with arguably one of the busiest periods of the year for dealerships in terms of new September registrations.

GAP Insurance As Part Of Finance: The FCA states that it does not see the new rules as being in conflict with the Consumer Credit Source Book (CONC) or Consumer Credit Act, and are of the opinion that it should not prevent customers adding GAP insurance premiums to the overall finance package, despite an adjustment being needed to the original finance quotation and application post the deferral period. The FCA state:

Although the additional amount to finance GAP would require a further assessment of creditworthiness, this need not necessarily involve a further credit reference agency check. For example, the firm may have sufficient information from a previous check, or maybe able to satisfy itself on creditworthiness in other ways.

All of the above create significant issues and challenges for those selling add-on GAP insurance and, in some cases, will mean a cultural change and transformation of sales processes. Not to mention the background matters of recording and managing the deferral period customers, monitoring, coaching and training on the new rules, evidencing on each sale that the rules have been adhered to, management of ‘cross jurisdictional’ sales – ie those which begin prior to September 1st but do not complete thus have to go through the new rules. Add to this that dealerships will be seasonally busy with new September registrations, it could prove to be a challenging time.

In short there is a lot to be done in a very short space of time, with no option but to get it right. Don’t allow your firm to fall foul of these new rules at a time when many are still waiting to have their FCA permissions reviewed and approved. The FCA are not like previous regulators who at times were reluctant to take action. In recent months we have seen public displays of large fines and enforcement to some of the larger financial institutions. However there is much that goes on in respect of enforcement away from the public eye.

The FCA have themselves commented that smaller firms or franchise operations pose the greatest risk of non-compliance and potential customer detriment, also that firms should take action themselves to ensure they are operating within the rules instead of waiting for the regulator to act. GAP insurance, by virtue of the fact that a consultation and new rules have been published, is something that the regulator considers to carry a significant element of risk to the customer therefore is something that is likely to be on the regulatory agenda post authorisation.

There are no hard and fast guidelines relating to the consequences of non-compliance however the FCA has a number of powers in its arsenal, such as fines, enforcement and prohibition, and utilising section 166 reviews which are incredibly costly and time consuming, in which firms must pay for an FCA approved skilled person to conduct an in depth review of their business to the requirements of the regulator.

Begin planning for the rule change now, that way come September you can still capitalise on the new registrations confident in the knowledge that your GAP insurance sales process is dealt with.

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