GAP Update Protect, 16 January 2015 Content Look at: • FCA’s GAP CP published on 12 December (CP14/29) • FCA’s informal industry consultation at Canary Wharf on the 21 Nov • FLA’s response to FCA’s informal consultation GAP consultation- CP14/29 • They’ve called it a ‘competition remedy’… • Follows the FCA’s final findings of its market study into general insurance add-on products, published in July 2014. • The FCA is still proposing a “deferred opt-in” remedy • The FCA’s key proposals now include: A four-day deferral period (meaning that GAP insurance could not be introduced and sold on the same day), which would be triggered when the customer is given certain pre-sale information about the GAP product Distributors would start the deferred period at a point of their choosing during the vehicle sale process – they would not be obliged to wait until a vehicle had been ordered or delivered The option for a confident customer to purchase GAP insurance the day after the deferred period has begun – if they initiate contact with the distributor to complete the sale GAP consultation- CP14/29 • Regarding the provision of pre-sale product information, the FCA proposes that firms selling GAP should give customers specific information in addition to the existing regulatory requirements of ICOB, in order to trigger the deferred opt-in period: The premium of the add-on GAP insurance policy, separately from other prices. The main benefits, exclusions and limitations of the add-on GAP insurance policy, including the duration of the policy. GAP consultation- CP14/29 That GAP insurance can be purchased from other sources. Whether the GAP insurance policy is optional. How the deferred opt-in works, including the date on which the prescribed information was provided so that it is clear to the customer when the ‘clock’ has started. Where add-on GAP insurance is being offered alongside vehicle financing, it should be clear that GAP insurance can be purchased elsewhere. GAP consultation- CP14/29 The Consultation Paper asks specifically for comments on: the timing of introduction of the new rules (the FCA suggests final rules would be published in June 2015, coming into force on 1 September 2015); the “trigger” for start of the deferral period; the length of the deferral period; the timing of the option for a customer to purchase GAP before the end of the period; and the content and delivery of the prescribed pre-sale information. GAP consultation- CP14/29 Next steps: • The consultation period runs until 13 March 2015 • We will now consider the detail with members before formulating our response to the FCA’s proposals • Comments welcome…? • Full CP can be found at: GAP consultation- CP14/29 http://www.fca.org.uk/static/documents/consultation-papers/cp1429.pdf FCA’s informal industry consultation at Canary Wharf on the 21 Nov • Participants were FLA along with the Retail Motor Industry Federation (RMIF), Association of British Insurers (ABI) and industry representatives , including insurers. • Discussed issues surrounding a proposed remedy to introduce a deferred opt-in period for selling Guaranteed Asset Protection (GAP) insurance – only area they were interested in • The meeting ran through a set of detailed questions focusing on the impact of various deferred opt-in periods; the costs of deferred opt-in to the consumer and businesses; and developing a better understanding of the GAP market and how GAP insurance is sold prior to a formal consultation on the design of the remedy FCA’s informal industry consultation at Canary Wharf on the 21 Nov Summary of the discussion: • The trade bodies and delegates representing motor finance, insurance and motor dealerships were all in agreement that a deferred opt-in was not the best remedy for the sale of GAP insurance. • The FCA did not understand the complexity of the sales process associated with GAP within dealerships; the benefits to the consumer of combining the cost of GAP with the finance agreement; and the negative impact a deferred opt-in would have on the GAP market, dealerships and the consumer. FCA’s informal industry consultation at Canary Wharf on the 21 Nov • There was strong push back shared by the industry delegation on deferred opt-in as a legitimate remedy and a good alternative solution provided (see below) • The FCA were using the meeting to see how the deferred opt-in could be ‘calibrated’ to reduce impact on businesses whilst maximising benefits to the consumer GAP sales process • Huge variation across providers FCA’s informal industry consultation at Canary Wharf on the 21 Nov • The FCA didn’t seem to know much about the GAP sales process • An estimate was given of between 70-80% of GAP is sold either on or before point of order • By legislating against point of sale there would be minimal consumer awareness of GAP insurance • Selling after delivery of the car would also result in lack of inertia for the product and therefore no protection for many consumers FCA’s informal industry consultation at Canary Wharf on the 21 Nov • The FCA suggested a three stage process could be feasible as long as the deferred opt-in period finished before a vehicle was delivered: o Point of offer – The benefits of GAP and its features are provided to the customer before a vehicle is decided on. o Point of sale – The customer returns to the dealer and chooses a car, pricing and GAP cost is worked through and sold. o Point of delivery – The customer picks up the vehicle and signs the contracts. FCA’s informal industry consultation at Canary Wharf on the 21 Nov • Industry explained why this wouldn’t work, including the speed of sale in the second hand car market and the pushing up of administration costs, funding issues etc. Competition • There is no evidence to suggest that introducing a deferred opt-in would create competition in the GAP market. • There are currently no barriers for new and existing insurance providers to sell GAP but the market has not significantly grown in recent years. • As the majority of GAP sales are made through dealerships - removing point of sale would result in ‘killing the market’ and would not incentivise the entry of new providers as the FCA suggest. • Online ‘distant selling’ providers of GAP insurance are mostly ‘unadvised’ offering check boxes to complete the sale. The majority of motor dealerships are ‘advised’ potentially offering better outcomes for consumers FCA’s informal industry consultation at Canary Wharf on the 21 Nov Impact on new vs used car sales • Figures agreed upon by delegates indicated that approximately 70% of used vehicles are delivered within 1-4 days whereas new vehicles tend to have much longer lead times. • A deferred-opt in period of anything less than 7 days would have a significant impact on the used vehicle market which makes up the majority of vehicle sales in the UK. FCA’s informal industry consultation at Canary Wharf on the 21 Nov Costs to businesses mentioned • Increased administration/operational costs associated with a new deferred opt-in process. i.e. new telesales teams to sell GAP post vehicle sale. • Additional credit check costs if a three stage GAP sales process (see above) is the direction of travel. • Marketing costs to ensure consumer awareness is raised post vehicle sale. • Additional underwriting costs if pricing of the product needs to be repeated at different stages FCA’s informal industry consultation at Canary Wharf on the 21 Nov Costs to consumer mentioned • Higher costs associated with the ‘water bed’ effect whereby additional costs incurred by the dealer are passed on to the consumer. • Inconvenience as the consumer would have to arrange GAP cover separately or undertake a lengthier sales process with the dealer. • Loss of protection – If the car has been delivered then there is no inertia to separately take out GAP despite the consumer gaining utility from having cover. FCA’s informal industry consultation at Canary Wharf on the 21 Nov Alternative solution put forward by industry - Introduction of a legislated 30 day cancellation period • A 30 day cancellation period for GAP was introduced in 2011 (after the initial GAP consultation process began) as best practice by the ABI, which all of their members have signed up to. Current legislation puts in place a 14 day cooling off period. Industry delegates agreed to the following suggestion: • Keeping point of sale • Extending the legislated cooling off period for GAP insurance from 14 days to 30 days from point of cover • Issuing a letter during the 30 day period to remind the consumer about; what GAP insurance cover protects against; the 30 day cancellation period; and noting the competition. FLA’s response to FCA’s informal consultation FLA proposed alternatives to a deferred opt-in period for GAP insurance • Solutions which generate better value to the consumer as well as increase competition - the two key areas the market study identified that a remedy would need to respond to. • We asked for these (refer below) to be included within the consultation: Detailed pre-contract information • Dealers would offer a full product quote - what the policy does; how much it costs; how to claim; the fact that GAP Insurance is available from other providers, etc. This is not a Key Fact document, it is mandated information that is presented to the customer in a durable format allowing them to shop around for alternatives. FLA’s response to FCA’s informal consultation Mandated price disclosure on all POS/marketing material • Distributors of GAP insurers would declare the equivalent of a recommended retail price providing the purchaser with readily available information to compare the price of products. • Greater price awareness to the consumer and therefore greater price symmetry across the market would put in place a mechanism that will drive down price at point of sale. Industry funded comparison website for GAP • A website funded by industry that would operate in the same way the ‘Compare Extended Warranties’ website does. This website was introduced into the Domestic Electronic Goods market, it is worth noting that point of sale prohibition was also suggested on this occasion but rejected. FLA’s response to FCA’s informal consultation Legislated 30 day cancellation period with letter • The solution that was suggested at 21st November meeting. A legislated 30 day cooling off period for GAP (which many providers already administer as best practice) followed up with a letter detailing the product that has been purchased, the protection this offers, price, a list of alternative providers and illustrating the number of days left before the 30 day period expires. FLA’s response to FCA’s informal consultation Mandated multiple GAP offering at point of sale • Whereby the dealer would be required by law to offer more than one GAP product at different price levels. This could consist of a variety of products providing differing levels of protection at different prices giving the consumer more choice at the point of sale Rigorous compliance audits • More rigorous auditing of the point of sale process for GAP was also suggested to combine with a 30 day cooling off period but could equally apply with all other alternatives suggested above.