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More freedom of choice needed in car after-sales market

OFT recommends lifting servicing ties

PN 170/03    17 December 2003

In a study published today the OFT called on car manufacturers and franchised dealers to lift restrictions on where new cars may be serviced while under warranty, and to improve the provision of information to customers on the terms and conditions of their warranties. If servicing restrictions remain, the OFT will consider launching a formal investigation under European competition law (see note 2).

Download New car warranties (pdf file 400 kb).

Recent changes to European regulation for the car sector mean that manufacturers and their franchised dealers are obliged to open themselves up to greater potential competition for after-sales services from garages outside their network. For this to work effectively customers must have undistorted choice about where they have this work undertaken.

Over 2.5 million new cars are sold in the UK every year. All new cars come with a manufacturer's warranty, generally running for one to three years, covering the premature failure of components due to manufacturing defects. Many manufacturers also offer, at no additional charge, 'dealer-based extended warranties' that take the total period of cover to three years. Under the terms of many of these extended warranties, and some manufacturers' warranties, the car must be serviced at a garage belonging to the manufacturer's franchised dealer network. About half of all new cars sold have warranties with such servicing restrictions.

The costs of after-sales service and repairs on average equate to about 40 per cent of the lifetime cost of a car. The total spend on car servicing and repair in the UK is around £10 billion a year, of which about £1.4 billion is spent on servicing cars up to three years' old. Franchised dealers carry out around 90 per cent of servicing of cars up to three years' old.

Servicing at franchised dealers is generally more expensive than servicing at independent garages, averaging £199 and £116 respectively (see note 3), without any apparent difference in the quality of the service offered. On this basis, servicing at franchised dealers may be costing consumers up to £500 million extra per year (see note 3).

The study found that customers are often unaware of the options available to them when choosing a garage, and that over two thirds of customers assume that their warranty will be invalidated if they use an independent garage, even where this is not the case.

The OFT recommends:

• that manufacturers and dealers should improve their advice to consumers on their options for servicing new and nearly-new cars and their statutory rights
• that manufacturers and dealers remove servicing restrictions from their new car warranties, to improve consumer choice and aid the development of more effective competition in the car after-sales market.

To promote further the development of competition in the market, the OFT will:

• launch a consumer awareness campaign in spring 2004 to provide clear information to buyers and owners of new and nearly-new cars about the choices available to them for servicing their cars
• issue business guidance to motor dealers and others in the car trade on the advice they should be providing to customers about servicing requirements
• work with motor trade associations on developing effective consumer codes of practice which include the requirement to provide clear and transparent information to consumers about servicing requirements and prices (see note 4).

John Vickers, OFT Chairman, said: 'Competition and consumer value in the after-sales market are inhibited by restrictions.on the car servicing choices of car owners.

'The car industry now has the opportunity to address the concerns in our report, and we welcome the recent moves by some manufacturers to remove servicing restrictions.'

NOTES

1. Download New car warranties or order from 0870 60 60 321.

2. Relevant elements of the new Cars Block Exemption Regulation (BER) came fully into force on 1 October 2003. Franchise agreements between car manufacturers and their dealers, of which the provision of warranties form a part, may benefit from an exemption under the BER from the Article 81(1) prohibition on anti-competitive agreements. Although the BER may still apply even though warranties contain servicing restrictions, the European Commission's explanatory brochure states that servicing restrictions deprive customers of their right to choose an independent repairer and prevent such repairers from competing effectively with the authorised network.

With effect from 1 May 2004 the OFT will gain responsibility for the enforcement of Article 81 of the EC Treaty within the UK under the terms of Regulation 1/2003/EC (The Modernisation Regulation). Article 29 of the Modernisation Regulation will permit the OFT to withdraw the benefit of the BER if the UK or any part of it has the characteristics of a distinct geographical market and the agreements in question have an effect incompatible with Article 81(3) in the UK.

3.  The OFT estimate of the potential cost to consumers is based on £1.4 billion (the value of new car servicing) multiplied by 40 per cent average lower prices taken from DTI mystery shopping data, weighted for that 90 per cent who use franchised dealer servicing.

Estimates of the cost for car servicing from the DTI mystery shopping research Car servicing and Repairs, DTI URV02/1293 (2000), and assuming one service per vehicle per year.

4. Under section 8 of the Enterprise Act 2003, the OFT has the power to approve consumer codes of practice, produced by code sponsors (usually trade associations or similar bodies), that safeguard and promote the interests of consumers.

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