OFT Consults on Package of Measures to Improve Extended Warranty Competition
Major UK electrical retailers have offered legal undertakings to improve the way the extended warranties market works, according to the OFT.
The promised measures include improving the information these retailers provide to shoppers and the launch of a comparison website.
This follows 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; and 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.
In light of the competition concerns found during the market study, the OFT has provisionally decided that it has reasonable grounds for suspecting that features of this market prevent, restrict or distort competition. It therefore provisionally considers that it has the power to refer the market to the CC under section 131 of the Enterprise Act 2002.
However, the OFT considers that the undertakings provide as comprehensive a solution to its concerns as is reasonable and practicable to the adverse effect on competition concerned and any detrimental effects on consumers so far as resulting from the adverse effect on competition.
It has therefore provisionally decided not to make a Market Investigation Reference to the CC. In addition to consulting on the undertakings, the OFT is also consulting on its proposed decision not to refer the market.
The undertakings, should they be agreed following the consultation, would be accepted under section 154 of the Enterprise Act 2002 and would be monitored by the OFT under section 162 of the same Act.
The undertakings would be enforceable by the OFT in the event of any non-compliance with them. If the undertakings are accepted, this will be only the second time that the OFT has accepted undertakings in lieu of making a Market Investigation Reference to the CC.
Following an OFT market study in 2001, the CC conducted an investigation of the extended warranties market and found that there was a lack of competition between providers which resulted in high prices for consumers. To address these concerns the Supply of Extended Warranties on Domestic Electrical Goods Order 2005 (the Order) was introduced to improve information to consumers and improve their rights to cancel a warranty.
The OFT considers that the proposed undertakings will complement the Order by further improving consumer information and improving the OFT’s ability to monitor compliance with the Order.