FCA Competition Interventions – A Warning from the GAP Market

FCA undertook a Market Study between 2013 and 2016 to investigate and remedy issues which it felt distorted competition in the Add-on Insurance market. The remedies included:-

• a deferred opt-in period for customers in the motor sales market when add-on “GAP” insurance is sold as part of buying a vehicle – imposed via the addition of ICOBS 6A1;
• a ban on the opt-out selling of general insurance products via the insertion of ICOBS 6A.2;
• two pilot studies on the FCA website to consider whether publication of information about “value” would improve competition in the add-on market.

In late July 2018 FCA published an evaluation of its GAP Intervention (Evaluation Paper 18/1), see:-

https://www.fca.org.uk/publication/corporate/gap-insurance-intervention-evaluation-paper.pdf

However FCA try to spin to the contrary, it makes pretty sorry reading, and should be a warning to the entire Add-on Insurance market – if and when FCA consider further interventions.

FCA remind us, in the Evaluation Paper, that it expected the impact of its remedy (basically, a period after information on a GAP product is given to the customer before a sale can be concluded) to be that:-

• add-on sales would be up to 32.5% lower;
• the share of sales of standalone GAP insurance would increase to up to 40% (of all sales);
• add-on prices would be up to 17% lower, with the price differential between add-on and standalone narrowing.

So, what actually happened in practice?

The outcomes from FCA’s remedies have been:-

• add-on GAP insurance sales are 16% to 23% lower than they would have been without FCA intervention;
• standalone GAP sales have increased from 6% to 8% of all GAP insurance sales;
• add-on prices are 2% to 3% lower than they would have been had FCA not intervened.

FCA headline their Evaluation with the words:-

“Our intervention has had a positive impact, but less than we expected before intervening”.

That is a massive understatement!

FCA were:-

• upto 50% out in their estimation of the impact on add-on sales;
• if my maths is correct, 80% out in its estimation of increase in the standalone market – if my maths is wrong (as is likely) the error is still huge; and
• some 15% out in their calculation (the percentage error is much larger) of the reduction which the remedy would achieve on the price of add-on insurance – which, again, is a massive

FCA promote the view that the evidence:-

“suggests that some consumers decide, on reflection, not to go ahead with the purchase”.

This seems to be an attempt to justify their remedy – but of course simply making it difficult for customers to make a purchase will, of itself, reduce sales. I can see no evidence from FCA that this reduction is in any measurable manner as a result of consumer “reflection” on the value of GAP insurance.

FCA may argue that if customers really, really wanted GAP insurance they would go to the much increased effort required to purchase it – but that is nonsense. I might really, really want a cream cake but if somebody shuts the cream cake shop then I may not end up buying a cream cake.

The moral from this Evaluation is clear. When FCA seek to address concerns (which may be legitimate) by using competition, rather than consumer, focused remedies they can get it horribly wrong.

The lesson was there for FCA from the Competition Commission investigation into the PPI market, which managed to destroy the market for an insurance which, if available and lawfully offered, is a valuable and much needed protection for millions of borrowers – who now have no protection as interest rates begin to rise.

I do hope this Evaluation will be a chastening episode for FCA (despite its spin).

For you (whichever markets you are in) it is reminder to ensure that, in your engagements with FCA and your trade associations, you should try to ensure that FCA learns from this episode and that future interventions into your markets are undertaken, not as academic exercises exploring competition economics – but focused full square on the needs, and proportionate protection, of consumers.