Gap insurers agree to suspend sales immediately after FCA voiced concerns

  • Some 80% of Gap insurance market withdrawn after FCA intervention
  • Car Dealer broke the news FCA was intervening and ‘effectively banning’ the sale
  • FCA says it is not banning the product, but industry fears repercussions if it still sells it

Time 11:48 am, February 9, 2024

Gap Insurance providers have agreed to pause sales of their products following a request from the Financial Conduct Authority.

Car Dealer exclusively revealed that the FCA had written to insurance providers warning them it may ‘intervene’ in the market and asked them to voluntarily withdraw their products from sale.

The news has now been confirmed with the FCA revealing some 80% of the market has agreed to suspend the sale of Gap insurance products.

The move, however, has led to some insurance providers claiming the FCA is in danger of ‘inadvertently putting consumers in vulnerable positions’ as a result of the action. They are worried with no cover available to car buyers, they could be left out of pocket in the event of an accident.

A letter sent to a number of insurers by the FCA in January warned providers that they should voluntarily withdraw the products from sale this week (Feb 7).

The FCA said it had ‘identified concerns with the design of Gap Insurance across all distribution channels’ and wants firms to make changes.

Today’s FCA statement said: ‘The regulator will consider firms’ proposals for different distribution channels, and recognises that some channels may be able to address these concerns more quickly.

‘Under the Consumer Duty, firms must provide fair value to customers, ensure that products and services meet their needs, and provide good customer service.’

Sheldon Mills, executive director of consumers and competition, added: ‘I welcome the agreement by firms providing Gap insurance to pause sales while they work on improving value for customers. 

‘Gap insurance can provide a useful service to customers, but in its current form it does not offer fair value and we want to see improvements.  

‘We will continue to work closely with firms as we carry out further engagement to resolve these issues and ensure customers are getting fair value products that meet their needs.’

Car dealers earn high commissions from the sale of the products – sometimes as much as 50% – and it is believed the FCA is concerned with the value dealers add to the product. 

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.

The FCA will now be conducting an investigation into Gap insurance for three to six months.

The FCA had previously told Car Dealer that it had ‘no intention of banning Gap Insurance as a product line’.

However, the industry says that even though there is no official ban, the interpretation of the advice contained within the FCA’s letter has been concerning enough for most insurers to pull their products, as today’s news proves.

‘They say it’s not a ban, but it is in all but name,’ said a leading provider of Gap. The source wished to remain anonymous for fear of reprisals for speaking out.

‘It means the insurance industry is having to pull the product because if they don’t, and the FCA investigation finds fault in the sale of the product, they’ll then be liable to further sanctions. No insurer is going to risk that.

‘We just need clarity on what it is the FCA doesn’t like about the product. Is it the commissions? If so we can cut the commissions paid to car dealers. Is it the price? If so we can cut that.

‘Our concern is there will be consumers taking out finance who cannot buy a Gap insurance product who will then suffer a total loss in an accident or theft and will not be covered. 

‘That goes against what the FCA is trying to do here – protecting consumers. They would be in more vulnerable positions.’

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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