Not just car finance: Was your GAP insurance also mis-sold?

With the Financial Conduct Authority (FCA) estimating that 14.2 million car finance agreements were mis-sold in the UK between 6 April 2007 and 1 November 2024, the scale of the motor finance scandal is clear.

But for many motorists, mis-selling did not end with the agreement for the vehicle itself.

Might your GAP insurance also have been mis-sold?

Guaranteed Asset Protection, widely known as GAP insurance, is commonly offered when taking out car financing. Car dealers, acting in the capacity of a broker, may have not only presented GAP insurance as an essential add-on, offering you protection to cover the difference between your car insurance payout and any outstanding finance in the event of the vehicle being written off, but may also have benefitted from excessive and undisclosed commissions added to the GAP insurance premium itself.

How instructing a solicitor for your car finance claim can help

One of the most significant benefits of instructing a solicitor to pursue your car finance mis-selling claim, rather than doing it yourself, is that a solicitor can look beyond your motor finance agreement and investigate whether there were issues across the rest of the sales process by requesting disclosure of all commissions you paid on related products financed at the same time.

On top of the issue of undisclosed commissions being included in these add-on products, inflated premiums for related insurance products were often “rolled up” into the cost of your car finance agreement. As a result, you were not only paying an excessive price for this kind of insurance but were also paying interest on that inflated price for the duration of your loan.

Regulator finds up to 70% commissions on GAP insurance

In September 2023, the FCA published its General insurance value measures data 2022. In this report, it highlighted concerns about GAP insurance and whether it was providing fair value in line with the relevant product governance requirements as outlined in its handbook.

This was supported by a press release, in which the regulator said it had written to GAP insurance providers regarding these issues and disclosed that 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.’

The regulator followed up with a February 2024 press release, just a month after commencing its investigation into historical car finance mis-selling due to the use of discretionary commission arrangements (DCAs) in motor finance agreements.

80% of the GAP insurance market agrees to pause sales

Firms accounting for 80% of the GAP market subsequently agreed to pause their sales of GAP insurance following the FCA’s February 2024 action, with several firms permitted by the regulator to recommence sales in May 2024.

Undisclosed sales practices: Cheaper policies were available

In many cases, motorists would also have not been made aware that cheaper and potentially more comprehensive GAP insurance policies were available from third-party insurers.

GapInsurance123 explains that buying GAP insurance alongside the car from the dealer incurs the higher rate of Insurance Premium Tax (IPT), at 20%. In contrast, buying GAP insurance from an independent source unconnected with the motor vehicle purchase incurs IPT at the standard rate of 12%, an immediate saving before you even come to hidden commissions.

Its sister site Total Loss further explains that GAP insurance from car dealers is often capped at 36 months of coverage and is more limited, whereas finding a policy yourself may enable you to get up to five years of coverage, which could prove vital if you were to see a car finance agreement into its fourth year.

Elsewhere, Car Dealer Magazine, citing a 2019 Which? study, says that GAP insurance policies bought from a dealer were between 102% and 278% more expensive than those bought from an insurer directly.

While mis-selling may have occurred if you were not explicitly informed that you could source a cheaper GAP insurance policy elsewhere, a solicitor can also investigate a separate and direct claim based on the hidden or excessive commissions added to your premium. A solicitor may also investigate other issues surrounding GAP insurance, including whether you were sold the product when you did not need it.

What about other products?

Did your car dealer also sell you products like cosmetic, alloy and tyre damage insurance?

Each of these policies may have also been sold to you with the same issues associated with GAP insurance, as we have outlined above.

The same Car Dealer Magazine report outlined that Which? found:

• cosmetic and dent insurance was nearly 60% cheaper to buy direct than from a dealership; and
• alloy and tyre insurance was up to 26% cheaper bought directly rather than from a dealership.

Although the higher price of these products could be due to other factors and not solely be commission-related, the report also cited an earlier FCA finding that dealerships received 54% commission, on average, from selling scratch and dent insurance.

Beyond add-ons: investigating irresponsible lending

Irrespective of whether you purchased and financed add-ons such as GAP insurance and cosmetic cover alongside your vehicle purchase, a solicitor who is dealing with your car finance claim may also discover grounds to discuss and investigate the circumstances of the sale, such as:

• whether you were left in a position in which you could not afford to pay your car finance;
• your PCP agreement adversely affected your ability to apply for and use other credit products;
• your car finance agreement left you unable to meet existing financial obligations;
• if the broker adequately assessed your financial situation; and
• whether your car finance agreement and the statements of payments and interest paid did or did not properly describe the basis of the interest that was calculated.

This additional detail could uncover both that you are eligible to object to the FCA’s proposed rate of compensatory interest (which the regulator has set at a rate likely to average out at 2.09%, to be calculated on a simple rather than compound basis, and is significantly lower than what had become the standard 8% statutory interest rate) and achieve a higher interest rate on your car finance redress, as well as whether you have potential grounds to bring an irresponsible lending claim.

Any irresponsible lending claim will fall outside the regulator’s car finance redress scheme and, depending on your financial circumstances at the time of taking out your motor finance agreement, may be a significantly more substantial claim.

Start your car finance claim and see what you discover

When you instruct Harcus Parker to investigate your car finance mis-selling claim, we are able to conduct checks, on your instruction, for all of these additional products and whether your lender breached their responsible lending obligations to you at the same time, and liaise with you further should we believe you are eligible for additional claims.

Check your eligibility and register your car finance mis-selling claim here.