A Major Lender May Have Been Setting Its Own GAP Insurance Profit, and the Evidence Is Growing

Evidence emerging from a growing number of cases suggests that one well-known motor finance lender may have purchased GAP insurance at a base price, decided how much profit it wished to retain and then presented the combined figure to customers as the policy premium. If the growing pattern reflects a standard pricing policy rather than a series of isolated transactions, the consequences will be enormous.

We are deliberately not naming the lender or underwriter at this stage. The evidence is still being consolidated and the relevant Financial Ombudsman Service decisions remain provisional. Once the evidence confirms that the arrangement was used as a matter of policy, and the Ombudsman decisions become final, we will publish the full details.

The real cost of GAP insurance hidden behind a single “premium”

Since early 2024, we have argued that the developing GAP insurance scandal cannot be understood merely by looking at the final price charged to the customer, nor the commission received by the motor dealership.

The more important questions have always been what the insurance cover actually cost, who controlled the final retail price, how much each party in the distribution chain retained and whether the customer was given an honest explanation of the commercial arrangement.

Evidence from an increasing number of complaints is providing some deeply concerning answers.

The emerging picture suggests that one major and very well-known motor finance lender purchased a GAP product from an insurance underwriter and then determined the amount it would add to that underlying cost before the policy was sold to the customer.

The lender may describe the difference as a profit margin. It may describe it as commission, remuneration, a distribution margin or something else entirely. The accounting label does not alter the economic reality.

The customer paid one figure. The underwriter received another. The difference was determined by and retained by the lender.

That is discretionary price-setting.

More importantly, it appears to have been discretionary price-setting by the very firm that benefited financially from increasing the price.

A GAP version of a discretionary commission arrangement

The technical definition of a motor finance discretionary commission arrangement is linked to a credit broker being permitted to decide or negotiate an element of the total charge for credit, with the broker’s remuneration being affected by that decision. The GAP arrangement now emerging may not fall within that precise regulatory definition, because it concerns the price of an insurance product rather than the interest rate on the finance agreement.

However, the economic conflict is remarkably similar.

In motor finance, the FCA found that commission models linking the broker’s earnings to the interest rate created an incentive to increase the customer’s finance costs. That conflict was sufficiently serious for the FCA to prohibit those arrangements from January 2021.

The developing GAP evidence raises an equivalent question. If a lender could determine the final price of the insurance and retain the difference between the underlying product cost and the price paid by the customer, every additional pound added to the price potentially increased the lender’s own return.

The discretion may have related to the GAP price rather than the finance interest rate, but the underlying incentive appears almost identical as the party able to influence the customer’s cost was also the party that benefited from increasing it.

That is why this cannot be dismissed as an ordinary retail mark-up or an argument over terminology. The central issue is whether a regulated financial business was given control over the amount of its own remuneration, what limits were placed upon that discretion, how the arrangement was supervised and what the customer was told.

The FCA’s rules expressly identify this type of risk

The most remarkable feature of the increasing evidence is that the FCA’s product governance rules already identify the precise danger created by this type of arrangement.

Since October 2021, the FCA’s rules have expressly required insurers to consider every element of the price paid by a customer, including distribution remuneration and situations in which the final pricing decision is taken by somebody else. The rules also identify the risk of allowing another party to set the final price through a net-pricing arrangement without adequate monitoring or oversight.

That wording could hardly be more relevant.

The FCA Handbook says firms should consider whether the difference between the insurance risk price and the total amount paid by the customer can be justified by the costs, benefits and services provided. It also identifies arrangements as problematic where remuneration increases the customer’s total price without adequate justification, or where somebody else is given discretion to set the final price without proper control.

Accordingly, the underwriter cannot simply say that it supplied the insurance and had no responsibility for the amount ultimately charged. Equally, the lender cannot avoid scrutiny by calling the sum it retained a “margin” rather than commission.

The regulatory assessment is concerned with substance, not creative accounting language.

Who set the price? Who received the difference? What services were provided in return? What controls existed? How did the underwriter satisfy itself that the final customer price represented fair value? How did the lender justify its return? Was there a maximum permitted margin, or could the lender decide the amount for itself?

Those questions must now be answered with evidence.

The customer may never have been told the true commercial arrangement

The pricing structure is only one part of the problem. The developing evidence also indicates that the lender’s commission and remuneration disclosures may have been seriously inadequate.

Documents appear to have referred to commission in generic or conditional terms without explaining the true nature of the arrangement. There is an obvious and important difference between telling a customer that a firm “may” receive commission and explaining that the firm has purchased the product at one price, will retain the difference between that amount and the retail price, and has itself determined the size of that difference.

If the lender knew that it would receive remuneration because the remuneration was built directly into the price it had selected, any suggestion that it might merely receive commission risks creating an entirely false impression.

The problem is not restricted to whether the exact amount had to be disclosed in pounds and pence. The more fundamental issue is whether the customer was told enough to understand the nature and source of the lender’s financial interest.

The FCA’s insurance rules require customers to be told about the nature of the remuneration received. Those rules encompass commission included within the premium and other forms of economic benefit connected to the insurance contract. Separately, information communicated to customers must be clear, fair and not misleading.

A customer presented with a single figure described as the GAP insurance premium would reasonably be likely to believe that figure represented the price of obtaining the insurance cover. The customer would not necessarily understand that a potentially substantial part of the price had been selected and retained by the lender selling or financing the product.

Without that information, the customer could not realistically assess the value of the insurance, the significance of the lender’s financial interest or the conflict created by allowing the lender to determine its own return.

Provisional Ombudsman decisions supports our concerns

Recent provisional decisions issued by the Financial Ombudsman Service support our concerns about the adequacy of the disclosure made in these cases.

Because the decisions remain provisional, we will publish and examine the decisions in detail once they becomes final, or are settled.

However, the importance should not be underestimated.

The provisional findings support the principle that generic or conditional commission wording may be inadequate where the business knew that remuneration would be received as part of the transaction. That becomes even more significant where the evidence indicates that the business did not merely receive a pre-determined commission but had some ability to decide the amount retained.

The lender was not simply a passive recipient of an unknown payment made by somebody else. On the evidence currently available, it appears to have been an active participant in determining the customer-facing price and, consequently, its own financial return.

That distinction is crucial.

“The customer knew the price” is not an answer

Businesses and, regrettably, some FOS investigators have previously attempted to dispose of GAP fair-value complaints by saying that the customer knew the total price and could have shopped elsewhere.

That approach is fundamentally inadequate where the complaint concerns a concealed pricing structure.

Knowing the final retail price does not tell the customer how much of that price relates to underwriting the insurance risk, how much has been retained by the dealership, how much has been retained by the lender, whether other intermediaries have been paid or whether the price was influenced by a discretionary remuneration arrangement.

A customer cannot assess what has been withheld from them.

More importantly, the FCA’s product governance rules expressly state that firms cannot rely upon individual customers to determine whether a product offers fair value instead of carrying out their own assessment, particularly where insurance is sold as an ancillary product alongside another purchase.

The regulatory obligation rests with the firms that manufacture and distribute the product. It cannot be transferred to the consumer through the suggestion that they should have searched the internet for a cheaper alternative.

The underwriter connection makes the pattern even more serious

The same GAP underwriter appears repeatedly within the cases now being reviewed, suggesting that the lender may have had an exclusive or near-exclusive relationship with that firm.

That underwriter was affected by the FCA’s intervention into the GAP market and paused sales while the regulator examined whether GAP products were providing fair value.

The wider regulatory context is already extraordinary. The FCA announced that firms accounting for approximately 80% of the GAP market had agreed to pause sales after the regulator was not satisfied that they had demonstrated fair value.

When some insurers were later permitted to recommence sales, the FCA specifically stated that the products had returned with materially lower commission levels.

That does not, by itself, determine the outcome of every historic complaint. It does, however, demolish any suggestion that the remuneration structure is irrelevant to whether GAP insurance represented fair value.

If the underwriter knew that this lender was setting the final price, it must explain what information it obtained about the prices customers were actually paying, what limits were imposed, how the lender’s margin was monitored and how the complete distribution arrangement passed any credible fair-value assessment.

If the underwriter did not know what the lender was charging, an equally serious question arises. How could it possibly assess whether its product was delivering fair value through that distribution channel?

What appeared isolated is beginning to look systemic

We identified and began raising the issue of discretionary GAP price-setting some time ago. At that stage, the evidence appeared unusual and it was unclear whether the arrangement was confined to a small number of transactions.

That position is changing.

The same lender, the same underwriter, similar commercial structures and similar disclosure concerns are now appearing across a growing number of cases. The evidence is beginning to point away from limited instances, and towards an established business model.

One unexplained transaction may be treated as an anomaly. Repeated evidence of the same arrangement across different consumers and different sales begins to indicate policy.

If that is ultimately established, the issue will no longer concern the outcome of a handful of individual FOS complaints. It will concern the design and operation of an entire GAP distribution arrangement, the number of consumers affected, the amount retained by the lender, the interest charged on financed premiums and whether historic remediation is required.

The potential scale could be substantial.

The FCA and FOS must investigate the entire pricing chain

Neither the FCA nor FOS can properly investigate these complaints by looking only at the policy wording, the customer’s demands-and-needs form or whether the consumer could theoretically have made a claim.

They must obtain the commercial agreement between the lender and underwriter, the net or wholesale cost of the product, the underwriting risk price, the retail pricing structure, any permitted pricing range, the lender’s actual margin, the method by which that margin was selected, the services supposedly provided in return, the fair-value assessments, the governance records, the customer disclosures, the sales volumes and the treatment of the GAP price within the finance agreement.

Anything less would leave the central complaint uninvestigated.

The FCA has already acknowledged through its wider thematic work that many insurance manufacturers have failed adequately to evidence fair value, while many distributors have failed properly to understand how their remuneration affects the value received by customers. It has also stated that firms identifying historic harm should act promptly, including by providing redress where appropriate.

This lender and underwriter should therefore already be examining their historic arrangements. They should not wait for each affected consumer to discover the structure individually through complaints, subject access requests and FOS proceedings.

This could be one of the biggest developments in the GAP scandal

The GAP scandal has so far largely been discussed in terms of low claims ratios, excessive dealership commissions and products that were unsuitable for the circumstances of the customer.

The evidence now emerging suggests that the problem may extend much further.

It may include some lenders and dealerships purchasing GAP products at an underlying cost, determining their own customer-facing price, retaining the resulting margin, failing adequately to explain that arrangement and, in some cases, charging interest on the inflated amount.

We will name the lender and underwriter once the evidence establishes that the pattern reflects an institutional policy rather than isolated examples. We will also publish the relevant Ombudsman findings once the provisional decisions become final.

The important question is no longer simply whether GAP commissions were excessive.

It is whether some dealerships and lenders were effectively permitted to decide the size of their own GAP insurance profit while customers were shown a single, unexplained figure presented as the policy premium.

If the pattern now emerging is confirmed across the lender’s wider customer book, this will be huge.