Mind the GAP

This article was originally published in the July 2015 issue of Motor Finance.

On 10 June, following consultation, the Financial Conduct Authority (FCA) published the final version of its rules on the sale of Guaranteed Asset Protection (GAP) insurance.

The rules will take effect from 1 September 2015 and firms will be expected to comply from that date. The rules will be incorporated into the Insurance: Conduct of Business sourcebook (ICOBS) at new chapter 6A and will apply to sales to consumer and commercial customers.

From 1 September, companies distributing add-on GAP insurance in connection with the sale of cars will be required to provide customers with prescribed information to help them shop around for a better deal and be more engaged when making decisions about the product. There will also be a deferral period (deferred opt-in) meaning GAP insurance cannot be introduced and sold on the same day.

The new ICOBS 6A.1.4R provides that:

1. before a GAP contract is concluded, a firm must give the customer the following information:
   1. the total premium of the GAP contract, separate from any other prices;
   2. the significant features and benefits, significant and unusual exclusions or limitations, and cross-references to the relevant policy document provisions;
   3. whether or not the GAP contract is sold in connection with vehicle finance, that GAP contracts are sold by other distributors;
   4. the duration of the policy;
   5. whether the GAP contract is optional or compulsory;
   6. when the GAP contract can be concluded by the firm as prescribed in ICOBS 6A.1.6R and ICOBS 6A.1.7R;
   7. the date the information in (a) to (f) has been provided to the customer.
2. This information must be communicated in a clear and accurate manner in writing or other durable medium and be made available and accessible to the customer.
3. This information must be drawn to the customer's attention and must be clearly identifiable as key information that the customer should read.

As to the deferred opt-in, ICOBS 6A.1.6R provides:

Except as specified in ICOBS 6A.1.7R, a GAP contract cannot be concluded by a firm until at least two clear days have passed since the firm complied with ICOB 6A.1.4R.

ICOBS 6A.1.7R provides:

A firm can conclude a GAP contract the day after providing the information in ICOBS 6A.1.4R to a customer if the customer:

1. initiates the conclusion of the GAP contract; and
2. consents to the firm concluding the GAP contract earlier than provided for in ICOBS 6A.1.6R and confirms that they understand the restrictions in ICOBS 6A.1.6R.

Comment

The list of prescribed information to be provided is not meant to be exhaustive and there is no specific format. The existing ICOBS requirements will also apply.

The new rules are aimed at addressing the FCA's concerns regarding the lack of competition in this market. It believes that by providing that the deferred opt-in period cannot be immediately waived, customers will have time to shop around for a cheaper alternative.

The FCA acknowledges that undue pressure may be asserted on customers to initiate the conclusion of the GAP contract and firms need to monitor their customer-initiated sales with this in mind.