Extended warranties at risk

The Office of Fair Trading ("OFT") today referred the market for the supply of extended warranties on domestic electrical goods to the Competition Commission.

The referral follows a study by the OFT's markets and policy initiatives division which found that competition in the market did not appear to be working effectively and that consumers were not adequately informed or protected.

In 1994 and 1996 the OFT reviewed extended warranties for electrical goods under its general duty under the Fair Trading Act 1973 to keep under review activities that may be detrimental to the economic interests of consumers. As a result of the first report, a voluntary code of practice was drawn up by the British Retail Consortium and has been in operation since May 1995. The OFT has now re-examined the market and concluded that the code of practice is not working.

The study looked at both consumer protection and competition issues and found:

• the effectiveness of competition in the market appears to be limited. Extended warranties are frequently purchased as an afterthought. Consumers do not shop around for the best value policy and the retailers' point of sale advantage makes it difficult for alternative suppliers to enter the market
• consumers are largely unaware that extended warranties can be bought from other sources, such as manufacturers and insurers, as well as electrical retailers
• the sales tactics of some retailers appear to exploit limited consumer information.
• the costs of extended warranties do not reflect the considerable variation in different brands' reliability. Consumers have limited information on these issues and so limited opportunity to make informed choices
• self regulation has not worked effectively

John Vickers, Director General of Fair Trading, said:

'Our study concludes that there are serious questions about how effectively competition in this market is working for consumers. It is now for the Competition Commission to investigate these questions in depth and report. We hope that making this reference may lead to improvements in competition and consumer choice.'

Dixons, the UK's largest electrical retailer, issued a statement today in which it criticised the reference.

The Director General of Fair Trading can make such a monopoly reference to the Competition Commission under the Fair Trading Act 1973. The reference will require the Competition Commission to investigate and report on the matters raised.

These are the same statutory provisions which were used for the recent enquiry into the supply of banking services to small and medium-sized enterprises. In the event of an adverse finding by the Competition Commission there are wide ranging powers to take remedial action.

The OFT report refers to a separate issue relating to the UK’s implementation of the Insurance Mediation Directive (due to be adopted shortly). HM Treasury is currently considering whether intermediaries selling extended warranty insurance will be included in statutory regulation by the FSA which is due to be introducted in mid 2004 (at a date known as "N3").

The results of the OFTs research and further information on the referral is available on its web site www.oft.gov.uk

For further information, please contact Nick Paul at [email protected] or on +44 (0)20 7367 2806.