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FCA ‘effectively banning’ car dealers from selling Gap Insurance from February

  • Sources say the FCA is asking insurers to voluntarily withdraw Gap Insurance products from sale
  • The insurance covers the difference between what a buyer paid and what they owe on finance in event of a write-off
  • The policies have high commissions and dealers fear this is what has prompted the investigation
  • FCA disappointed with market’s response to its warnings about Gap made in September
  • Regulator says that despite voluntary withdrawal rumours it has no plans to ban Gap Insurance

Time 10:09 am, January 26, 2024

Sources suggest the Financial Conduct Authority (FCA) is about to step in and ‘effectively ban’ Gap Insurance sales.

Several car dealer sources say they have been told by their providers that Guaranteed Asset Protection (Gap) Insurance could be ‘banned’ as early as February.

One source said two of their insurers have been asked by the FCA to voluntarily withdraw Gap Insurance from sale from February 7 while it investigates further.

Sources say they have been told verbally by their insurance providers that this is ‘effectively a ban in all but name’. They believe an FCA investigation into the sale of the products could take as long as six months.

Gap Insurance is sold by car dealers to cover the difference between the amount buyers paid for a vehicle, or owe on finance, and the amount a car insurer would pay out for it in the event of the car being written off or stolen.

It’s designed to cover the shortfall – or ‘gap’ – created when a customer may owe more on a finance agreement than the insurer is willing to pay out for their car.

The policy typically costs a few hundred pounds and is often a lucrative extra revenue stream for car dealers when sold on top of finance agreements, with high commissions for dealers.

Some insurance providers are believed to have received letters from the FCA asking them to ‘voluntarily withdraw’ their products from sale. Meanwhile, sources at other insurers say they have been told they can keep selling their products but are ‘not allowed to take on new dealers’.

One insurance provider source said: ‘The issue the FCA has is the value that the car dealers add to the product is low and the commissions they earn are very high.

‘The regulator would rather people go online to buy these products directly where they won’t have to pay the high commission charges they are faced with at dealers.’

In September, the FCA warned providers that Gap products ‘may be failing to provide fair value to customers’. Its data suggested just 6% of the amount customers pay in premiums was being paid out in claims.

The financial watchdog said then: ‘The FCA has told firms manufacturing Gap Insurance products they must take immediate action to prove customers are getting a fair deal, or it will intervene – giving firms a three-month ultimatum.’

It now looks like the FCA is set to take action.

A spokesperson for the FCA told Car Dealer: ‘We’re disappointed with the market’s response to our warnings to improve the value of Gap Insurance for customers. 

‘We have told firms to take immediate action to show how customers are getting a fair deal or we will intervene.

‘We have no intention of banning Gap Insurance as a product line.’

Revenue stream

One car dealer said: ‘We sell a lot of these policies as they are of genuine benefit to customers, especially when a new car depreciates quickly as soon as it leaves a dealership.

‘In those early months of owning a new car, the difference between what the insurer will pay out for it and what is owed on finance rarely matches, so I think these policies are good for consumers.’

Other car dealer bosses we spoke to said they didn’t think an outright ban would be forthcoming.

One main dealer group boss added: ‘I think the FCA believes Gap is a good product because, like life insurance, there is a 100% payout when a claim is made. 

‘The issue the FCA has with Gap is the amount the dealer charges. Originally, you could charge a 60% commission over the cost the dealer paid for the product. Over time, they have reduced that to 55% and now it’s 50%.’

Another dealer boss explained that policies at his site could cost up to £400 but he had seen that at some luxury brands they can be as much as £1,000 on more expensive cars. 

‘Margins are high for an insurance product, which is what has prompted the FCA investigation,’ he added.

Paul Daly, partner at accountancy firm UHY Hacker Young, said: ‘The impact will of course depend on the dealer’s current position. There has been a gradual movement away from selling these products due to concerns around this associated risk.

‘However, for those that are still heavily reliant on Gap commissions there will need to be an adjustment to the business model.

‘There is clearly a risk of margins reducing, which will be difficult to absorb at the same time as the used car market being in such a challenging position.’

The FCA also recently announced it will be taking a closer look at the commission payments made to dealers for now-banned commission arrangements. It follows a high number of complaints from consumers.

In 2021, the FCA banned commission models that gave motor finance brokers and dealers an incentive to raise customers’ finance costs.

It made the move after discovering ‘serious concerns’ about the way lenders chose to reward car retailers and other credit brokers.

James Baggott's avatar

James is the founder and editor-in-chief of Car Dealer Magazine, and CEO of parent company Baize Group. James has been a motoring journalist for more than 20 years writing about cars and the car industry.

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