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The FCA published their final report on their market study MS 14/1 on 24 July 2014. The market study had looked at the add-on insurance market including GAP insurance.
The Study’s Findings
The FCA concluded that the add-ons market lacked effective competition and highlighted the following:
Market Study Responses
The FCA received 65 responses to their draft study. The responses have been summarised as the following:
The Study’s Conclusions
The FCA concluded that following the consultation the feedback from stakeholders does not challenge their overall conclusion that competition in the add-ons market is insufficient. They do not believe respondents sufficiently challenged any of the FCA’s methodology or present sufficient evidence that the conclusions were wrong. On the basis of this the FCA are making their provisional findings final:
The FCA do make the following points:
The FCA have noted their particular concern with the GAP market. They believe competition is ineffective and intervention is needed to address this.
Their key proposal is a ‘deferred opt-in’ to limit point of sale advantage. Also that consumers must be told at point of sale about shopping around and to increase transparency pricing information must be given.
Respondents to the market study expressed concern over their proposals, in particular that the deferred ‘opt-in’ was in effect a point of sale ban. Respondents believed that the increase cost of having an opt-in plus lower GAP sales would lead to dealers stopping sales of GAP. In addition, if dealers stopped providing GAP then customers would not be made aware of the existence of such products and could be left uninsured.
Concern was also raised around the inadequacy of general motor insurance to fund any ‘gap.’
More generally, respondents commented on the benefits to the consumer from the sales process in a dealership compared to stand alone sales. Also, the convenience to the consumer of being able to buy GAP insurance at the same time as a car.
Concern was further raised about how the ‘opt-in’ would work in practice, when the deferral period would start and for how long. A number of improvements to the ‘opt-in’ were proposed. These include starting the deferral at point of order rather than sale. Also, suggestions of both information and explanation at point of sale, disclosure of alternative options, commission disclosure and extended cooling off periods.
The FCA state that the proposed remedies including the deferred ‘opt-in’ is to promote effective competition in the GAP market. Intervention in the point of sale is a new method of addressing consumer detriment under the FCA’s competition mandate.
The FCA have also stated that they will do more work before consulting on how to address the problems they have found in the GAP market. They acknowledge the concerns from respondents about any negative impact of their remedies, including potential withdrawal of dealers from the market. They will look at incentives for distributors; impact on consumer demand and behaviour; and the impact on consumers of the loss of purchase convenience. They will also look at suggestions made by respondents and consider the remedies that were introduced to the extended warranty market.
Banning default remedies – this has generally been supported by respondents although comments have been made that the FCA should be very careful in the design of the remedy to ensure no unintended consequences.
Price comparison websites – the remedy to improve price comparison websites for add-ons was generally supported. However, a few concerns were raised including whether introducing add-ons too early in the sales process could just confuse the consumer.
Similar concerns regarding add-ons and PCW’s were also raised recently with the CMA’s investigation into ‘private motor insurance.’ The FCA will therefore work closely with the CMA to develop remedies.
Publishingclaims ratios – FCA want to use the claims ratio as the major indicator of value for add-ons. However, most respondents were critical of this remedy citing whether it would actually be an accurate representation of product value or could be misunderstood by consumers and act as a disincentive to buy an insurance product. There were also a number of practical objections around data gathering and the claims ratio itself, as well as the issue of differing IPT rates between stand-alone providers and retailers.
FCA still wish to push forward this proposal but will use feedback on how to develop and design an appropriate measure. Alternatives to the claims ratio will be considered.
The NFDA is concerned that even though significant comment and supporting evidence has been given in response to the FCA’s initial Market Study findings and proposed remedies that the FCA appear to on whole dismiss it. They acknowledge the concerns from respondents but have not generally made any change to their position on add-on insurance and in particular GAP. The do though acknowledge that any remedies need to be designed in a manner that will avoid causing damage to the market and that they will consult stakeholders in this process.
The NFDA will continue to lobby with the FCA and more widely with Government to ensure that any remedies that are put in place do not cause significant detriment to dealers. We are already in contact with the FCA to ensure we are involved with their proposed workshops.