Advantage Finance’s Own GAP Spreadsheet Exposes a 73.4% “Profit Margin”, Before Interest

We have been talking openly about the next mis-selling scandal, GAP insurance, and the reasons why this scandal occured, the weak regulator that allowed it to flourish, and the grotesque numbers involved. Over the course of the last 30 months we have been gathering evidence and data, and submitting it to the FCA and the Financial Ombudsman Service.

Our first case study focuses on Advantage Finance, following its submission of data for a number of complaints we had submitted, coupled with a spreadsheet of data that it sent to us, which provided an overall pattern

Advantage Finance says the money it retained from the sale of GAP insurance should be described as a “profit margin” rather than commission.

Its explanation is that it purchased the GAP product directly from the insurance underwriter and then sold that product directly to the customer. According to Advantage Finance, there was therefore no conventional payment of commission from an insurer to an intermediary.

That may be the terminology Advantage Finance prefers, but it does not change the economic reality exposed by its own spreadsheet.

Advantage Finance’s Own Numbers

Firstly, we must stipulate that these figures may not replicate the averages across it’s business, but it does share similar patterns with our own obtained data.

The underlying product-cost information was provided to us by Advantage Finance itself, possibly in error.

On the data provided within it’s spreadsheet, the average amount attributed to the underwriter’s “risk”, together with the separate ITP element, was just £189.09.

The average price charged to the customer, before a penny of finance interest was added, was £717.14.

The difference was £528.05 per GAP product, detailed as “GAP profit”.

According to the underlying transaction-level data, Advantage Finance retained an average of 73.4% of the price paid by the customer.

This is before any interest is charged on top.

The average figures were:

Whichever way Advantage Finance seeks to present it, the substance remains the same. On average, fewer than 27 pence from every pound paid by the customer was attributed to the underwriter’s risk and the ITP element.

The remainder sat within Advantage Finance’s own margin.

Our Previous 76.8% Case Was Not an Outlier

We have previously reported on an individual Advantage Finance case in which just 23.2% of the customer’s GAP price was attributed to the underlying product, while Advantage Finance retained the remaining 76.8%.

That disclosure was shocking in isolation. The wider spreadsheet now indicates that it was not some extraordinary one-off transaction.

It seemingly formed part of a much broader pattern.

The average retained proportion identified across Advantage Finance’s spreadsheet was 73.4%, compared to our article which detailed a case where 76.8% was retained. The previous case was therefore not wildly removed from the ordinary economics of the products contained within the data.

The figures reveal what appears to be a business model in which the amount retained by Advantage Finance substantially exceeded the amount attributed to the insurance risk and ITP.

The spreadsheet data showed customers were charged an average of £717.14 for something carrying an average identified cost of £189.09.

That is not a minor retail mark-up. It is not an inconsequential administration charge. It is an average difference of £528.05 on a relatively simple add-on insurance product.

Calling It “Profit Margin” Does Not Make It Disappear

Advantage Finance appears keen to distinguish its retained margin from commission because it says it purchased the product from the underwriter before reselling it to the customer.

That distinction may have accounting significance to Advantage Finance. It does not answer the central questions of disclosure, value and consumer fairness.

The £528.05 existed only because the GAP product was sold. It represented remuneration generated through the distribution of an insurance product alongside a finance agreement.

It can therefore reasonably be regarded as commission-like remuneration, even where Advantage Finance chooses to record or describe it as a profit margin.

To be clear, we are not claiming that every penny of the £528.05 automatically became bottom-line net profit after Advantage Finance paid its operating costs, salaries, taxes and other overheads.

That is not the point.

The point is that Advantage Finance’s own data attributes only £189.09 of the average £717.14 customer price to the underwriter risk and ITP. The remaining £528.05 was retained within Advantage Finance’s margin.

Customers were not told that this was how the price had been constructed, possibly for obvious reasons.

The choice of label does not make the amount smaller. It does not make the arrangement transparent. It does not prove that the product represented fair value, and it does not demonstrate that customers were placed in a position to understand what they were really paying for.

Our Case Data Regarding Interest Charged on the Mark-Up

The position becomes even more troubling when the GAP product is added to the finance agreement.

Advantage Finance did not simply retain a substantial margin at the point of sale. It often then financed the full retail price, including its own mark-up, and charges the customer interest on that amount.

A customer would therefore be borrowing money not only to meet the underlying cost attributed to the insurance product, but also to fund Advantage Finance’s own retained margin.

Advantage Finance then earned interest through the credit agreement.

Our analysis of the complaints we have submitted on behalf of our clients shows average interest of £367.86 on the GAP element of the finance agreements examined.

When the retained margin and finance interest within our cases are considered, they represent an average of 80.3% of the total amount payable by our clients.

In practical terms, over 80 pence from every pound ultimately paid by those customers was attributable to Advantage Finance’s retained margin and the interest charged through the credit agreement, rather than the amount identified as the underwriter risk and ITP.

The description “profit margin” becomes increasingly inadequate when customers were not merely paying the margin, but borrowing it from the same business and paying interest on it over the term of the agreement.

These Figures Blow Plevin Out of the Water

The comparison with Plevin v Paragon Personal Finance Ltd is unavoidable.

In Plevin, of the PPI premium paid, 71.8% was taken in commission before the balance was remitted to the insurer. The amount of the commission and the identity of its recipients were not disclosed to the customer.

The Supreme Court considered the level of undisclosed commission to be highly significant when determining whether the relationship between the borrower and creditor was unfair.

Advantage Finance’s transaction-level average of 73.4% before interest is already greater than the 71.8% commission at the heart of Plevin.

Once the interest charged on the financed GAP product is included, our complaint data shows that the average proportion attributable to the margin and interest rises to 80.3% of the total amount paid.

Nobody is suggesting that GAP insurance and PPI are identical products, or that a margin described in accounting records must automatically be treated as commission for every legal purpose, but what does seem increasingly clear is that the industry sought to replace the lost revenues of PPI with similar highly profitable products such as GAP insurance.

A customer purchases an insurance product without apparently being told that the overwhelming majority of the amount being charged was not attributed to the underlying insured risk.

Whether Advantage Finance calls that difference commission, remuneration, mark-up or profit margin, it was plainly information capable of affecting a customer’s assessment of value.

A reasonable customer told that something costing £717.14 (before interest), was only worth £189.09 for the underwriter risk and ITP would inevitably question whether the product represented value for money.

They would also be entitled to ask why they were expected to borrow the additional £528.05 and pay finance interest on it.

Read the Supreme Court judgment in Plevin v Paragon Personal Finance Ltd.

The Figures Exceed the Levels That Triggered FCA Intervention

The FCA intervened in the GAP insurance market after its data showed that only around 6% of the amount paid by customers was being paid out in claims. It also identified examples in which 70% of insurance premiums were being paid as commission to parties involved in selling GAP policies.

The FCA intervention was, in our opinion, inadequate, and did not go far enough. This is clear, based upon the data and evidence that we have uncovered. If we can uncover it by continuing to battle on behalf of our customers, the FCA could have obtained it.

Nevertheless, the regulator was sufficiently concerned to secure the suspension of sales by firms accounting for approximately 80% of the GAP market while changes were made to improve fair value.

When firms were subsequently permitted to recommence GAP sales, the FCA stated that they had done so with materially lower commission levels, improving the value offered to customers.

Against that background, Advantage Finance’s average retained margin of 73.4%, even before interest, demands serious scrutiny.

It exceeds the “up to” 70% commission examples publicly identified by the FCA when it intervened in the GAP market.

That should immediately raise questions about Advantage Finance’s historic product governance, pricing, disclosure and fair-value assessments.

It should also lead to a detailed examination of how Advantage Finance decided, based upon it’s spreadsheet disclosure, that charging an average of £717.14 for a product with £189.09 attributed to the underwriter risk and ITP produced a fair outcome for the customer.

The position is particularly serious because Advantage Finance says it bought and resold the product itself.

If that account is correct, and we’ve no reason to conclude otherwise, Advantage Finance was not merely a passive lender financing a price set elsewhere in a lengthy distribution chain. It participated directly in obtaining the product, establishing the retail price, retaining the resulting margin and financing the amount charged to the customer.

There is no distant dealership or unrelated intermediary behind which it can hide.

Read the FCA’s announcement concerning the suspension of GAP insurance sales.

Read the FCA’s update on firms recommencing GAP insurance sales.

The Limitation Argument Is Doomed to Fail

Despite the data now emerging, Advantage Finance continues to seek to rely upon limitation and time-bar arguments when responding to GAP complaints.

On the complaints we are examining, that argument is doomed to fail.

The relevant question is not simply when the GAP insurance was sold. The Financial Ombudsman Service rules also permit consideration of when the customer became aware, or ought reasonably to have become aware, that they had cause to complain.

Under DISP 2.8.2R, the applicable period is six years from the event complained of or, where later, three years from the date on which the customer became aware or ought reasonably to have become aware that there was cause for complaint.

How could customers reasonably have known that they had cause to complain about a 73.4% retained margin when Advantage Finance had not disclosed that figure?

How could they have known that the average amount attributed to the underwriter risk and ITP was £189.09 when they had been charged an average of £717.14?

How could they have challenged the fairness of financing Advantage Finance’s own £528.05 mark-up when they did not know how the price had been constructed?

The FCA Handbook’s guidance concerning PPI commission is also instructive. It explains that general knowledge of a possible problem with the sale of a product would not ordinarily be sufficient, by itself, to establish awareness of a separate complaint concerning the failure to disclose commission.

A customer cannot reasonably be expected to complain about information they did not possess.

Advantage Finance cannot keep the financial structure of a product hidden from the customer and then argue that the customer should somehow have discovered and complained about it years earlier.

The relevant knowledge was obtained only through later investigation, complaints and disclosure.

A standard limitation paragraph does not overcome that fundamental problem.

Read DISP 2.8 of the FCA Handbook.

The Evidence Is Now With the FOS and FCA

The findings and supporting information have been provided to the Financial Ombudsman Service.

The evidence is also being sent to the Financial Conduct Authority, and the time for action has long since passed.

The names of the people that our evidence have been retained, and will be shared with the appropriate parties in the event they decide silence to be the best option.

There is no hiding place anymore.

The FOS must now examine the substance of these transactions rather than accepting the terminology selected by Advantage Finance.

Whether Advantage Finance describes £528.05 as commission or profit margin, the FOS must consider the scale of the amount retained, what was disclosed to the customer, the interest charged on the financed product, the product’s suitability and value, and the overall fairness of the resulting debtor-creditor relationship.

The FCA must decide whether this data points towards a systemic historic issue requiring wider investigation. Put simply, it does and the FCA is fully aware that it does.

Its own intervention in the GAP market recognised that commission and distribution remuneration were central to the fair-value problem. Advantage Finance should not escape equivalent scrutiny merely because it placed its own remuneration beneath a different heading in a spreadsheet.

The label cannot be allowed to become a loophole.

Advantage Finance Can Debate the Vocabulary, but Not Its Own Numbers

Advantage Finance may continue to call £528.05 a profit margin rather than commission.

It may continue attempting to dispose of complaints through limitation arguments.

It may continue claiming that buying the product directly from the underwriter somehow changes the significance of what it retained.

None of that changes the arithmetic.

This does not merely raise questions about an isolated GAP insurance sale. It exposes the economics of the product far and wide.

Advantage Finance can argue about the vocabulary.

It cannot argue with its own numbers.