Experts have forecast that drivers will save roughly £70million this year due to intervention by the financial watchdog which unveiled new regulations.
The Consumer Duty looks to protect drivers and ensure firms put customers’ needs first above commission and fundraising measures.
The legislation, brought in by the Financial Conduct Authority, came into force last year and since then has seen greater scrutiny applied to car finance companies and insurers.
One of the biggest pushes of the Consumer Duty was the intervention by the FCA into the unfair Guaranteed Asset Protection (GAP) scandal.
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GAP insurance covers the financial shortfall in a claim
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GAP cover is an essential car insurance add-on that covers the difference between the amount the insurer pays for a written-off vehicle, for example, and the amount a driver needs to pay to buy a new or equivalent model.
It provides cover for a financial shortfall that can happen when a customer’s vehicle is written off or stolen. Despite this, many insurers were accused of misleading customers and massively overcharging on commission.
The financial watchdog previously uncovered that only six per cent of the amount customers paid in premiums in GAP insurance was paid out in claims.
Shockingly, the regulator also found examples of some firms paying out 70 per cent of the insurance premiums in commission.
In September last year, the regulator demanded that firms offering GAP insurance products take immediate action to prove customers were getting a fair deal.
But after an initial review, the FCA claimed it was “not satisfied” and decided to pause the sales of GAP products on March 31.
The FCA then began investigating claims which resulted in roughly 80 per cent of GAP cover providers agreeing to a temporary sales pause of the product.
It wasn’t until late May that the FCA cleared 80 per cent of providers to go back to selling the product.
Sheldon Mills, executive director of consumers and competition at the FCA, said: “Our intervention on GAP products – where we asked firms to look at their commission structure – will, we anticipate, see firms make changes to improve the value of GAP insurance which, based on assumptions about the expected changes, will save their customers around £70million.
“In response to the Duty, a large financial advice firm is making significant changes to its business model to simplify and unbundle its charging structure, resulting in improved outcomes for clients with greater transparency and comparability with other firms and the removal of an early withdrawal charge for certain products.
“We will not stand in the way of a well-run business making profit in a well-functioning market, where there is effective competition that is in the interests of consumers. Profits drive innovation and better consumer services.”
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Consumer Duty looks to protect customers and ensure they receive a fair deal
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However, Mills added that while profits are important for business, they must not be at the expense of consumers receiving fair value.
“The price a customer pays must be reasonable compared to the overall benefits they receive,” he stated.
Based in New York, Stephen Freeman is a Senior Editor at Trending Insurance News. Previously he has worked for Forbes and The Huffington Post. Steven is a graduate of Risk Management at the University of New York.