Out-Law News 2 min. read

Sales of extra warranties break rules, says watchdog


Nearly half of shops selling electrical goods are not supplying consumers with enough information about their extended warranty schemes, the Office of Fair Trading (OFT) has said.

Advert: The Sourcing Summit, 18 & 19 November 2008, Queen Elizabeth II Conference Centre, LondonExtended warranties are paid-for guarantees that last longer than manufacturers' warranties. They have emerged as a popular product for retailers in recent years but a Competition Commission inquiry in 2001 led the Government to regulate the market in warranties. The Commission had reported that consumers were not well enough informed or protected in the warranty market. Most warranties are bought when a consumer buys the goods that the warranty protects.

Because of the power held by the retailer of the goods which warranties protect, the Commission called the situation a "complex monopoly", and reported that the extended warranty market was characterised by high prices and high profits.

In 2005 the Government passed an Order forcing retailers to publish clear information about warranty schemes where they are sold. The Order also mandated specific cancellation and termination rights for consumers.

An OFT report has found, though, that nearly half of the retailers it has examined are not displaying all the required information.

"We found that in around 45 per cent of the DEG (domestic electrical goods) areas we visited retailers had not listed information about the price, duration and optional nature of extended warranties next to any DEG in the area, and in about 20 per cent of areas this information was listed next to only some DEGs," said the report.

"In about 10 per cent of cases where either some or no information was provided next to individual DEGs, a standard extended warranty applying to a range of products was displayed," it said.

The OFT had conducted 'mystery shopper' exercises, where staff pretended to be customers to assess how retailers performed. They found that shops were not performing well in keeping potential customers informed.

"There has not been an increase in leaflets 'prominently displayed' in shops and five out of the 13 leaflets we reviewed had at least one or more pieces of required information missing," said the report.

"There is also evidence that some sales assistants are providing incorrect information concerning the consumer rights given by the Order (as many as one-third in the mystery shopper exercise)," it said.

Though young, the trade in extended warranties is now substantial. "This is an important market for UK consumers, who spend around £24.3 billion a year on domestic electrical goods such as fridges, TVs, and washing machines, and we are concerned that there is a lack of compliance by a number of sellers," said Tony Donaldson, director of economics at the OFT. "'The OFT continues to monitor the sector to ensure that consumers know their rights and are given the correct information when buying extended warranties."

The OFT's research did discover some improvements in the operation of the market, though. It said that 15% of consumers now shop around for warranties, compared to just 4% in 2002. The number of people whose purchase of warranties takes place at the point of sale has fallen from 82% to 68% over the same period, it said.

The OFT estimates the consumer benefit since the introduction of the new rules in 2005 at £51 million.

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