The FCA published new rules in June governing the sale of add-on Guaranteed Asset Protection (GAP) insurance. The rules came into force on 1 September 2015 and apply to commercial customers as well as retail customers. GAP insurance is used to protect the insured party against any shortfall between the purchase price, or total amount payable under a credit or hire agreement, and the amount an insurer will pay out, which is usually linked to market value at the time of the loss. The add-on market for these products is when GAP insurance is sold alongside a motor vehicle.
The FCA has introduced the new rules out of a concern that GAP products being sold as an add-on have led to poor competition in the GAP market. The FCA has observed that typical customer behavior is to purchase such products almost as an afterthought at the point of sale, rather than with the diligence seen when purchasing other financial products. This analysis has been reached at least in part through the application of behavioral economics – something particularly in vogue with the FCA at the moment.
The rules themselves, published in PS15/13, have two main elements for firms distributing add-on GAP insurance:
- to provide retail and commercial customers with prescribed information to encourage them to shop around and be more engaged when making decisions about purchasing GAP products; and
- to introduce a deferral period – referred to by the FCA as the “deferred opt-in” – with the result that GAP insurance cannot be introduced and sold on the same day.
The customer must be given the following information:
- Total GAP premium separate from any other prices and costs
- Significant features, benefits, exclusions and limits and cross-reference to relevant product documents
- The fact that GAP is sold by other distributors
- The duration of the policy
- Whether GAP is optional or compulsory
- How the deferred opt-in period works, including the date the prescribed information was provided to the customer and when the sale can be concluded by the firm
- Must be appropriate to the circumstances of the customer;
- Must be specifically brought to the customer’s attention and clearly identifiable as key information; and
- Must be communicated in a clear and accurate manner, in writing or any durable medium.
Although there are no mandatory record keeping requirements, firms need to demonstrate when and how the prescribed information has been provided to the customer.
The Deferred Opt-in
Under the deferred opt-in, a GAP contract with a customer cannot be concluded by a firm until at least two days have passed since the prescribed information was provided. The customer can initiate the conclusion of the sale the day after receiving the prescribed information, so long as:
- it is the customer that initiates the conclusion of the GAP contract;
- the customer consents to the firm concluding the GAP contract earlier than provided for; and
- the customer confirms they understand they are choosing not to be subject to the deferred opt-in period.
More Rules to Come?
The FCA published an additional consultation paper in March 2015 that emerged from the same market study as was behind PS15/3 and its preceding consultation paper, CP14/29. The consultation period closed on this additional paper in June. We await the FCA’s response to the industry’s views.