OFT Forces Extended Warranty Crackdown

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The Office of Fair Trading investigation into extended warranties draws to a conclusionYesterday the Office of Fair Trading announced that it was to review undertakings from major retailers such as Currys, Comet and Argos before deciding whether or not to refer the matter to the Competition Commission.

Last year the OFT launched the investigation into the £1 billion extended warranty market for electrical goods such as televisions, washing machines, fridge freezers and so on to see if the market was fair, choice was offered and if these warranties offered value for money to consumers.

From yesterday's press release it would appear that the OFT don't think that there is enough choice or value being offered by these major retailers.

Of course the press have weighed in on the matter but we have seen some misleading advice (again) from some media outlets, such as the Mail Online which states that, "However, there are doubts whether consumers need them at all, given that - in theory - the Sale of Goods Act offers protection for up to six years if a product fails." which whilst technically correct it is entirely dependent on the customer being able to prove that the fault was evident from new. This does not cover people for general wear and tear or random breakdowns.

However it is fair to say that many of these warranties do offer extremely poor value with the figures that are offered as examples by the OFT and media sources with some (notably Currys "Whatever Happens" warranty) costing up to 80% of the initial purchase price of the goods.

Shopping around for a warranty can save more than 50% but, even at that, do bear in mind that warranty companies are not charities and sell these warranties to make profits from them.

The full press release form the OFT is as follows:

Major UK electrical retailers have offered legal undertakings to improve the way the extended warranties market works, the OFT announced today.

The promised measures include improving the information these retailers provide to shoppers and the launch of a comparison website.

This follows today's OFT market study on extended warranties, which highlights competition concerns in the £1 billion per year market that could mean consumers are not getting the best value for money.

As a result of the OFT's concerns, Dixons, Comet and Argos, the largest retail providers of extended warranties, have offered undertakings which the OFT will now consult on whether to accept, instead of referring the market to the Competition Commission (CC) for a detailed investigation.

The OFT's market study found that, despite some improvements in the market including some lower prices, several competition concerns remain. In particular:

  • Competition remains limited by the retailers' 'point of sale' advantage in being able to sell extended warranties at the same time as they sell the electrical goods.
  • Only around a quarter of consumers shop around for extended warranties, which remains low compared to many other insurance products.
  • When buying an extended warranty at the same time as an electrical good, shoppers do not have enough relevant information to make an informed decision about whether the extended warranty is value for money.
  • Pay As You Go (PAYG) warranties, where shoppers pay for a rolling monthly contract, can be very expensive if held for lengthy periods and can be considerably more expensive than comparable fixed term warranties.

To address these concerns, Dixons, Comet and Argos have agreed to:

  • establish, maintain and publicise an extended warranties comparison website, to make shopping around easier
  • provide more accessible information via in-store leaflets, including on the availability of alternative providers
  • conduct regular independent mystery shopping exercises to help ensure shoppers get accurate information from sales staff - and report back to the OFT on the results
  • provide clear on-shelf information about the annual equivalent prices of PAYG warranties to help shoppers understand the longer term costs of those products. This currently affects Dixons, which is the only one of these three retailers to sell PAYG warranties.

Ann Pope, Director in the OFT's Goods and Consumer Group, said:

'Millions of extended warranties are sold in the UK each year and we remain concerned that, despite recent improvements, this market does not work as well as it could for consumers. We welcome the retailers' initiative in offering undertakings and we now want to hear from consumers and others whether they think these will lead to improvements.

'If these undertakings are accepted by the OFT it would allow us to address the competition concerns more quickly and also reduce the burdens of further, detailed investigation.'

The OFT expects to reach a final decision on whether to accept the undertakings later this Spring.

As part of the OFT's Know Your Consumer Rights campaign the OFT has produced a short online film to inform shoppers about their statutory rights when buying electrical goods and to encourage them to shop around before buying an extended warranty.

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