Bridging the Gap – FCA permits the return of GAP insurance

This week, I bought a car. On Monday morning, as I was dotting the ‘i’s and crossing the ‘t’s on the finance documents, the sales assistant mentioned that there was some more insurance I might want to consider. It was, apparently, called ‘GAP’ insurance. Apparently they had not sold it for a while, but it had “just come back on line - and it's offering lots more now” (a direct quote from the lovely Eleanor at VW).

GAP (“Guaranteed Asset Protection”) insurance is an add-on to motor insurance covering the difference between a vehicle’s purchase price / outstanding finance and its current market value, if it is written off before finance has been repaid. It is also an early casualty of the FCA’s new Consumer Duty.

The FCA has been concerned for some time that many GAP insurance policies are not providing fair value to consumers. The Duty has given it leverage for action. In February 2024, the FCA confirmed that multiple insurance firms had agreed to pause sales of GAP insurance pending work to improve their value. 

The reason Eleanor was able to offer me this product in the context of my purchase this week was because, on Monday, the FCA announced that it had allowed four firms to recommence sales of GAP insurance. It is now satisfied that the products in question offer a much better deal.  In particular, the revised products have materially lower levels of commission being paid out to those selling GAP insurance policies, improving value for customers.

Commission in the motor finance sector is a hot topic, as the ongoing review of historic motor finance commission arrangements demonstrates. Fair value has been the FCA’s tool of choice since the Duty came into force for new and existing products in July last year. It seems to have had concerns about the value offered by several products – and practices – and has wasted little time in targeting them. 

The distinction between ensuring products are fair value and becoming a price regulator is a fine one. This distinction is likely to become even less clear when the FCA moves on from arguably more obvious cases of questionable value - undisclosed/excessive commissions, charges for services customers are not using (St James’s Place) and stagnant interest rates (cash savings) - and begins to tackle more nuanced aspects of these assessments.

 As ever, firms should watch this space. In the meantime, it looks like Eleanor was correct in her assessment of the value of VW's Gap insurance.