PN 40/02    2 July 2002

The OFT today referred the market for the supply of extended warranties on domestic electrical goods, worth over £500 million a year, to the Competition Commission.

This 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.

Extended warranties typically can add around 50 per cent to the cost of an electrical good. Most extended warranties are sold by the large multiple electrical retailers.

The study, launched in October 2001, is the first OFT market study to be published. It has explicitly looked at both consumer protection and competition issues together. It 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. For example, there is evidence that sales staff may emphasise the risk of product failure and the difficulty and expense of obtaining independent repairs. OFT research found, however, that consumers' satisfaction was at least as high with repairs carried out by independent repairers as those carried out under extended warranties
• 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. The British Retail Consortium Code of Practice, introduced in 1995, has not been followed widely and there is no comprehensive regulatory or legislative framework to safeguard consumers.

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.'

The Competition Commission has 12 months to report to the Secretary of State on:

• whether, and in whose favour, a 'monopoly situation' exists in the sector
• whether that situation is being exploited or maintained,
• whether any facts found during the investigation operate, or may be expected to operate, against the public interest and, if so
• any remedies which it considers would address these detriments.

The OFT will be launching a campaign to promote better consumer awareness of their statutory rights when purchasing goods and services, including extended warranties. It will also be continuing to investigate complaints received about unfair contract terms in extended warranties.

OFT advice to consumers: think before you buy

Before purchasing an extended warranty with an electrical appliance consumers are advised to:

• think whether the likely reliability of the electrical good makes an extended warranty good value
• find out what the extended warranty does – and does not – cover over and above the manufacturer's guarantee
• think about buying the warranty from another supplier, such as an insurer or manufacturer.

Many extended warranties are bought as an afterthought. It is best to think before you buy.

NOTES

1.  Download Extended warranties on domestic electrical goods (pdf file 137 kb). View the full reports of the surveys of independent repairers and consumers.

2.  Extended warranties are contracts which cover consumers for the cost of any repairs or replacements within a specified period, typically four years, beyond the one year normally covered by manufacturer's, retailer's or importer's guarantee.

3.  Under section 2 of the Fair Trading Act 1973, the Director General of Fair Trading has a general duty to keep under review commercial activities in the UK with a view to becoming aware of monopoly situations or uncompetitive practices.

4.  One type of 'monopoly situation' exists where at least one quarter of all the goods or services of a particular description supplied in the UK are supplied by, or to, any two or more companies which so conduct their respective affairs (whether by agreement or not) as in any way to prevent, distort or restrict competition.

5.  The markets and policy initiatives division of the OFT conducts around five full studies a year. The possible outcomes of these include:

• enforcement action by the OFT's competition and consumer regulation divisions
• a reference of the market to the Competition Commission
• recommendations that the Government consider changes in laws and regulations and to regulators, self-regulatory bodies and other to consider changes to their rules
• campaigns to promote consumer education and awareness
• a clean bill of health.

6. The markets and policy initiatives division complements the competition and consumer regulation enforcement divisions. It takes a broader perspective in reviewing markets that could work better for consumers.

The division has three branches:

MPI1 – provides the central resource of specialist economic, statistical, and financial analysis advisors

MPI2 - is responsible for the OFT's enhanced role in investigating markets that might not be working well for consumers but where competition or consumer regulation enforcement action does not appear to be the immediate answer

MPI3 - co-ordinates with Government, other organisations (both national and international) involved in consumer protection and competition matters, manages a public information line on matters within the OFT's responsibilities, and handles preparations for OFT's role as regulator of payment systems.

7.  Since its establishment in October 2001 the markets and policy initiatives division has started five studies in the following markets:

• Consumer IT services (a report will be published in the autumn)
• Pharmacies (a report will be published in the autumn)
• Extended warranties on domestic electrical goods
• Private dentistry (following a super-complaint from the Consumers' Association, a full study was launched and a report will be published by the end of the year)
• Estate agency (a report will be published in 2003).

8.  In this press release the functions of the Director General of Fair Trading (DGFT) under the Act are for simplicity described as the functions of 'the OFT'. The Enterprise Bill proposes to replace the office of the DGFT with the OFT, to which would be transferred the DGFT's functions.