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The biggest providers of a type of add-on insurance for car buyers have agreed to pause selling the product after the UK financial regulator intervened over concern that consumers were not getting value for money.
The Financial Conduct Authority said providers accounting for 80 per cent of the market for so-called guaranteed asset protection (Gap) insurance had agreed to the temporary ban while they implemented unspecified changes to their products. These policies are sold alongside car finance to cover the difference between the vehicle’s purchase price and its current market value.
The providers targeted were being prioritised because they were the biggest and would be dealt with “as quickly as possible”, said one person familiar with the matter. The regulator is also talking to other providers.
“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,” said Sheldon Mills, executive director of consumers and competition at the FCA.
He added that the regulator would “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.”
Drivers paid out about £300mn in premiums on 2.4mn Gap insurance policies in the UK in 2022, according to the latest data. The product is designed to protect customers who use car finance from losses should their vehicle be written off before the loan has been repaid.
But the FCA said that only 6 per cent of the premiums were being paid out in claims, making Gap insurance hugely profitable in comparison with mainstream insurance products. It had also seen some examples of companies paying out 70 per cent of the premiums in commission to third parties involved in selling the add-on insurance.
The move comes after the FCA launched a probe last month into now-banned commission practices in the car finance sector stretching back to 2007, which could open the way for up to £13bn in compensation payments.
The regulator previously intervened in the market for Gap products in 2014. The latest clampdown is part of a wider drive by the FCA as it implements new consumer duty rules that has seen it target other financial services providers, including investment platforms and wealth managers.
