On June 10 2015 the Financial Conduct Authority (FCA) published Policy Statement 15/13, which confirms the new regulatory rules for certain add-on guaranteed asset protection (GAP) sales.(1) Policy Statement15/13 implements one of four competition remedies arising from the FCA's general insurance add-ons market study (for further details please see "General insurance add-on market study and forthcoming rules").
The new Insurance Conduct of Business Sourcebook (ICOBS) rules – introducing a deferred opt-in regime and prescribed information requirement – will come into force on September 1 2015. Where a firm has begun discussing add-on GAP cover with a customer but will not conclude the contract until or after September 1 2015, this sale must also comply with the new rules.
The new add-on GAP rules will capture sales to both retail consumers and commercial customers, notwithstanding the narrower focus of the FCA market study.
Applicability of new rules – 'GAP contracts' sold in connection with vehicle
New ICOBS Chapter 6A.1 will apply where a firm sells a GAP contract to a customer in connection with the sale of a vehicle by the firm or a person connected to the firm.(2) Specifically, the following terms should be considered:
- 'GAP contract' – this will be defined in the FCA Handbook as "a guaranteed asset protection contract; [being] a contract of insurance covering 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".
- 'In connection with the sale of a vehicle' – the primary product being sold to which the GAP insurance is an add-on need not be the vehicle itself, but can be other goods and services commonly purchased with a vehicle (eg, a credit agreement).(3)
- A 'person connected to the firm' – this includes an introducer, authorised representative or other person with a relevant business relationship with the firm.(4)
Deferred opt-in for add-on GAP contract sales
The deferred opt-in regime is about pausing the add-on GAP sales process so that add-on GAP cannot be introduced and sold to a customer on the same day.(5)
The deferred opt-in comprises three components:
- Component 1 (when the deferral period starts) – the deferral period, or sales process 'pause', will start when the customer is given the prescribed information (see below), this being the point when the customer has the necessary information to consider the purchase and compare against other products (Day 1).
- Component 2 (when the deferral period ends) – the deferral period will end on Day 4, when the distributor can contact the customer to conclude the add-on GAP sale.
- Component 3 (customer's ability to break the deferral period) – customers will, on their own initiative, be able to break the pause on Day 2, provided that they confirm their understanding of the usual restriction on firm-initiated sales. Customers must not be encouraged to shortcut the deferral period and any customer-initiated contact must be monitored.(6) It will be impossible for customers (including repeat customers) to immediately waive the deferral period after receiving the prescribed information.(7)
Before concluding any GAP contract sale in connection with a vehicle, firms should first consider whether it would be in the customer's interest to receive the prescribed information again. Firms should have regard, among other things, to:
- the overall complexity of the policy being sold;
- the knowledge, experience and ability of a typical customer of that policy;
- the importance of the information to the customer's decision making; and
- the point, if any, at which it may be most useful for the customer to receive it again.(8)
Situations which may trigger a firm to reissue the prescribed information include changes to the price or policy terms or a lengthy deferral period.
The rules still apply where the add-on GAP cover is part of an unbreakable package (ie, where it is a condition or requirement of the primary product purchase that the customer buy the other products forming part of the package).
Provision of prescribed information for add-on GAP contract sales
The deferral period will be triggered once the firm has provided the customer with, and drawn the customer's attention to, the following information:(9)
- the total premium, separately from other prices;
- the significant features and benefits, 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 contract;
- whether the GAP contract is optional or compulsory; and
- when the GAP contract can be concluded by the firm, including the date on which this prescribed information was provided so that it is clear to the customer when the clock has started.
The prescribed information must be given in writing or another durable medium, but firms can choose the format in which they provide it.
The existing rules in ICOBS 6 (Product Information) – which require other pre-conclusion (as well as post-conclusion) disclosures – will continue to apply to add-on GAP contract sales.
For further information on this topic please contact Marisa Orr or Martin Membery at Sidley Austin LLP by telephone (+44 20 7360 3600?) or email (firstname.lastname@example.org or email@example.com). The Sidley Austin LLP website can be accessed at www.sidley.com.
(1) "Guaranteed Asset Protection insurance: competition remedy including feedback on CP14/29 and final rules" (PS15/13), June 2014, available at www.fca.org.uk/static/documents/policy-statements/ps15-13.pdf.
(2) ICOBS 6A.1.1R.
(3) ICOBS 6A.1.2G.
(4) ICOBS 6A.1.3G.
(5) ICOBS 6A.1.6-7R, 6A.1.8G, 6.1.7-8G.
(6) "Guaranteed Asset Protection insurance: a competition remedy" (CP14/29), December 2014, page 15, available at www.fca.org.uk/static/documents/consultation-papers/cp14-29.pdf.
(7) PS15/13, pages 18-19.
(8) See ICOBS 6.1.7-8G.
(9) ICOBS 6A1.4R.
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