On December 12, the Financial Conduct Authority (FCA) issued a consultation paper on the detail of the proposed add-on Guaranteed Asset Protection (GAP) insurance remedy. The FCA carried out a market study into general insurance add-ons, finding that:
- the add-on mechanism often affects consumers’ decision-making and weakens engagement resulting in a point-of-sale advantage for distributors; and
- there is a lack of transparency and comparability about the value provided by general insurance products leading to poor value for consumers.
The FCA proposed four remedies, one of which related specifically to GAP insurance. Most of the 1.3 million GAP insurance policies in force were sold as an add-on during the motor vehicle sales process. This consultation paper proposes specific rules to improve competition in the GAP insurance market. These are:
The deferred opt-in
The market study found that the main harm to competition in the GAP insurance market is the advantage held by distributors of motor vehicles. GAP insurance distributors benefit from a point-of-sale advantage and from customer inertia – 83 per cent of buyers of add-on GAP insurance did not consider other policies when purchasing compared to 9 per cent of standalone GAP insurance buyers. The FCA proposes a deferred opt-in meaning there is a pause in the add-on GAP insurance sales process known as the ‘deferral period’. When add-on GAP insurance is sold as part of buying a vehicle, distributors cannot introduce the product and conclude the sale on the same day. The deferral period would start when the customer is given certain prescribed pre-sale information and end four days after that information is provided.
The FCA proposes a variation to enable a confident customer to make the purchase sooner if they wish to do so. If the customer initiates contact, the distributor can conclude an add-on GAP insurance contract on the day after the start of the deferral period. Customers who contact the add-on distributor must give their agreement that they are aware of the longer deferral period but want to proceed with the sale anyway. The FCA would expect firms to monitor high-levels of customer-initiated completions of sales and warns that this variation should not be used to circumvent the primary rule.
Information to encourage shopping around
The second component of the remedy package is the provision of prescribed information to encourage customers to consider whether they need GAP insurance and encourage shopping around for the most appropriate product. The FCA proposes to require firms to provide specified information, some of which is in addition to the existing regulatory requirements in ICOBS 6.1.5. Provision of this information would trigger the start of the deferral period. Distributors must provide customers with the following information, as a minimum, in a clear, accurate and prominent manner in writing:
- The premium of the add-on GAP insurance policy, separately from other prices.
- The main benefits, exclusions and limitations, as well as the duration of the policy.
- That GAP insurance can be purchased from other sources.
- Whether the GAP insurance policy is optional.
- How the deferred opt-in works, including the date on which the prescribed information was provided so that it is clear to the customer when the ‘clock’ has started.
- Where add-on GAP insurance is being offered alongside vehicle financing, it should be clear that GAP insurance can be purchased elsewhere.
The deadline for comments on the remedy is March 13, 2015. The FCA intends to publish final rules in a Policy Statement by June 2015 with a view to the rules coming into force on September 1, 2015. These rules will impact any firm that distributes add-on GAP insurance in connection with motor vehicle sales, insurers that underwrite GAP insurance products and other intermediaries involved in the distribution of GAP insurance.
These requirements only apply to GAP insurance sold as an add-on as part of a motor vehicle sale. Standalone GAP insurance and GAP insurance sold alongside motor vehicle insurance, for example, are excluded from the scope of these proposals.
Interestingly, the FCA also cites the recent Supreme Court decision on commission disclosure in Plevin v Paragon Personal Finance. While it does not affect these proposals directly, the FCA notes that it is considering the issues raised by the judgment and suggests that firms do the same. For our analysis ofPlevin please refer to our Insurance update - November 28, 2014.
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