The motor finance world is feeling the regulatory heat right now. As previously reported and commented on, PCP plans have been heavily scrutinised, with hidden commissions being at the top of the ‘must do better’ list. While the FCA review remains in progress, we now see that 80% of Guaranteed Asset Protection firms have agreed to suspend sales at the ‘request’ of the FCA. The remaining firms have agreed to market their products only through existing distributors.
Both PCP and GAP can provide a useful service for customers, but like all regulated products, they must provide fair value. As is often the case, where the regulator decides to implement a market intervention, it’s not the core product itself that is the problem – it is the way that it is structured, priced and sold that gives concern.
Against this background, regulator intervention is not surprising. Firstly, the FCA highlights that only 6% of the amount customers pay in premiums for GAP insurance is paid out in claims. It also notes that some firms are paying out 70% rates of commission in GAP policy sales.
This scenario reminds us of the single premium ASU scandals of the late 90s and needs early resolution to avoid similar outcomes.
While it may be that motor industry financing is feeling the pain of regulatory interventions now, no firm in the financial services’ world is immune. We believe some firms think Consumer Duty is a temporary headline act and such interventions will calm down – we don’t.
We know many firms have worked hard to get Consumer Duty projects over the line, but now it is time to raise standards even further – it’s not good enough to do just enough!
Firms need to embrace a full range of benchmarking and modelling tools to evidence that fair value is delivered across product life cycles, while managing the tricky balance of making money to survive when facing increased costs. This is often reflected in pricing challenges and additional risks; precisely the balance the FCA expects firms to be able to articulate, to its satisfaction.
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