The FCA's new rules on the sale of Guaranteed Asset Protection (GAP) insurance will come into force in a fortnight's time on 1 September 2015. The new rules require certain prescribed information to be provided at the point of sale and delay the point of sale to at least a day after the provision of this information. Insurers selling GAP insurance should review their distribution and sales arrangements to ensure that they reflect the new rules.
A GAP contract is defined as a contract of insurance which covers a policyholder, in the event of total loss to a vehicle against the difference between: (a) the amount claimed under the policyholder's vehicle policy in respect of that loss; and (b) an amount defined in, or calculated in accordance with, the GAP contract. GAP insurance is a product which is sold alongside a vehicle and so is referred to by the FCA as 'Add-on GAP'.
Since 2014 the FCA has had a new objective to promote effective competition in the interests of consumers. It has expressed concerns about the sale of add-on insurance generally, which it has previously addressed through thematic reviews. The FCA's particular concerns with Add-on GAP insurance led it to embark on its first ever market study in 2014. The results of this market study, published as Market Study MS14/01 in July 2014, led the FCA to propose remedies to address shortcomings in competition it identified in the market. The new rules were published in June this year in Policy Statement PS15/13 Guaranteed Asset Protection insurance: competition remedy.
New rules in force from 1 September 2015
The remedies set out by the FCA took the form of a new chapter 6A.1 in ICOBS (ICOBS 6A), the first product-specific conduct rules in ICOBS. (The title of the new chapter suggests more product-specific rules are anticipated).
These new rules are designed to allow customers to make a more informed decision when purchasing an important insurance product by providing them information to help them shop around and be more engaged when making decisions about purchasing the product. ICOBS 6A.1.4R provides that a firm selling a GAP contract must provide certain information, including:
- the total premium of the GAP contract, separate from any other prices;
- the significant features and benefits, significant and unusual exclusions or limitations, and cross-references to the relevant policy document provisions;
- whether or not the GAP contract is sold in connection with vehicle finance and that GAP contracts are sold by other distributors;
- the duration of the policy;
- whether the GAP contract is optional or compulsory;
- when the GAP contract can be concluded by the firm; and
- the date the information set out above is provided to the customer.
The new rules also introduce a deferral period, which should further encourage customers to shop around. ICOBS 6A.1.6R provides that a firm cannot conclude a GAP contract until at least two clear days have passed since the firm sent the information set out above. However, if a long time passes before the customer seeks to conclude the contract, the firm should consider (under guidance at ICOBS 6A.1.8G) whether it should provide the information again.
The firm may shorten the period that the customer has to wait to conclude the GAP contract to the day after providing the information. However, it may only do so if the customer initiates the conclusion of the contract, confirms that they have understood the two-clear-day rule and consents to the firm concluding the contract earlier than provided for in that rule.
The new rules are likely to make distribution arrangements rather cumbersome and insurers may face resistance from distributors. Car dealerships will need to insist that customers return to the dealership on the fourth day following receipt of the information required under the new rules to enter into the GAP insurance product. This will either delay the transfer of the vehicle to the customer or leave the customer on risk for a short period of time after leaving the dealership. Furthermore, the two clear day rule might lead to inconvenience for consumers who are not likely to be able to conclude the purchase of a car over a weekend but may need to return several days later during the working week or even the next weekend.
'Most respondents' to the FCA's consultation paper on the new rules raised exactly these concerns, particularly the risk of customers being left uninsured, but the FCA concluded that competition trumped convenience. It will be interesting to see how FOS deals with complaints about insurers which refuse to cover customers to whom they or their distributors have provided the prescribed information but who have an accident prior to the conclusion of the GAP contract.