Evidence of discretionary commissions in GAP insurance submitted to FCA

A Financial Conduct Authority (FCA)-regulated claims management company says it has written evidence from a GAP insurance product administrator that car dealerships were allowed to set their own commission on such products.

The firm in question, Your Money Claim, says it has sent the evidence it gathered to the FCA and called for a full investigation into the GAP insurance market.

Has the FCA investigated GAP insurance before?

Yes. In September 2023, the regulator’s General insurance value measures data 2022 report highlighted significant concerns about whether GAP insurance was providing consumers with fair value, in line with the FCA Handbook’s product governance requirements.

In a press release accompanying the publishing of its report, the FCA said it had ‘seen examples of some firms paying out up to 70% of the value of insurance premiums in commission to parties in the distribution chain, such as motor dealerships’ and had written to GAP insurance providers regarding these issues.

The regulator took further action in February 2024, resulting in multiple insurance firms comprising 80% of the GAP market agreeing to pause GAP insurance sales with the FCA. The regulator subsequently permitted several of these firms to recommence sales in May 2024.

Why this issue mattered then, and matters now

The FCA’s February 2024 action on GAP insurance came less than a month after it launched its investigation into historical car finance mis-selling.

Whilst no subsequent investigation or further action has yet followed, it is of significant concern to us that GAP insurance mis-selling may also have been occurring at scale alongside car finance mis-selling. As the regulator's redress scheme proposals are lender-led and complex, the opportunity to explore additional potential claims is one of several benefits that consumers who instruct a solicitor for their car finance claim may unlock.

For its part, Your Money Claim describes the FCA's 2024 activities in the GAP market as a 'box-ticking exercise'. Although that is not a description we would ascribe to the regulator’s work, the evidence the firm says it has compiled is compelling, draws parallels with the discretionary commission arrangements (DCAs) that are at the centre of the UK's car finance mis-selling scandal and suggests there may be significant scope for GAP insurance mis-selling claims.

This includes a written response from what Your Money Claim describes as a ‘major GAP product administrator,’ which it says explains how GAP insurance pricing historically worked, namely that:

• the insurance underwriter sets the net price of the GAP insurance policy; and
• the administrator applies its remuneration, then applies a commission cap of up to 50% for the dealer to add, and tells the dealer that it is responsible for setting the commission, so long as it is within the 50% cap.

Despite these ‘constraints’, the firm says it investigated a single case in which 78% commission was applied to the GAP insurance policy.

The similarities and differences between DCA and GAP insurance mis-selling

The most significant similarity between DCA and GAP insurance mis-selling is that customers were not told that the car dealer had the discretion effectively to set the price of the insurance policy – to their own benefit.

But DCA and GAP insurance mis-selling are slightly different, owing to the mechanisms in place. For example, if your car finance agreement included a DCA, your car dealer would have increased your interest rate, which subsequently meant that your total cost of credit was higher. Whereas with GAP insurance, the commission increased the price of your policy. Either way, you paid more than you should have, with your car dealer profiting at your expense.

However, you potentially lost out to an even greater degree because, if you did not pay for your GAP insurance in a lump sum and the cost of your policy was 'rolled-up' with your car finance agreement and other additional products that your dealer may have sold to you, then you would have been paying interest on the cost of your policy for many years, too. That interest represents further unearned profits from which lenders benefitted.

What will happen next?

The FCA will not add a provision for GAP insurance mis-selling into its current car finance redress proposals, and it is uncertain whether the regulator will launch a formal investigation into the sector and historical mis-selling practices, as it has done with motor finance.

That is why, despite the regulator’s redress scheme meaning you can bring a motor finance mis-selling claim yourself without professional representation, you may wish to consider instructing a solicitor to do so on your behalf. In addition to building and strengthening your car finance mis-selling claim(s), a solicitor can also investigate and uncover whether you have grounds to bring a GAP insurance mis-selling claim or other alternative claims, such as for products like cosmetic, alloy and tyre damage insurance or for irresponsible lending.

Register your car finance mis-selling claim with Harcus Parker here.