OFT acts to improve competition in extended warranties

27 Jun 2012 04:29 PM

The OFT has accepted legally enforceable undertakings offered by the three largest UK electrical retailers to improve the way the extended warranties market works, following consultation with business and consumers.

The OFT's market study of the £1 billion per year extended warranties market, published in February, highlighted a number of competition concerns that could mean customers are not getting the best value for money.

To address these concerns, the OFT worked with Dixons, Comet and Argos to agree undertakings, which take into account points raised during the consultation, rather than referring the market to the Competition Commission (CC).

Dixons, Comet and Argos have agreed to:

• Maintain and publicise an independently operated extended warranties price comparison website, to make shopping around easier.
  
• Provide more easily available information via in-store leaflets and retailer websites, including on the availability of alternative warranty providers.
  
• Conduct regular independent mystery shopping exercises to help ensure shoppers get accurate information from sales staff - and report the results to the OFT.
  
• Provide clear on-shelf information about the annual equivalent prices of 'Pay As You Go' (PAYG) warranties, to help shoppers understand the longer term costs when they enter these rolling monthly contracts. This currently affects Dixons as the only one of the three retailers to sell PAYG warranties.

Ann Pope, Director in the OFT's Goods and Consumer Group, said: 

'We think the undertakings we have secured are important for shoppers who will now have better access to the information they need to make an informed decision when choosing an extended warranty.

'We welcome the constructive approach taken by Dixons, Comet and Argos to agree this practical solution, which will bring more immediate benefits for consumers, and avoid the burden on business of further investigation.'

NOTES

1. Further details, including the OFT's market study report, the modifications made to the undertakings following consultation and the final version of the undertakings, can be found on the OFT website.
   
2. The OFT's market study found that, despite some improvements in the market, several competition concerns remain:
   
   - Competition is 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. 
   
   - 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.
   
   - PAYG warranties can be very expensive if held for lengthy periods and can be considerably more expensive than comparable fixed term warranties.
   
3. In light of these competition concerns, the OFT decided that it has reasonable grounds for suspecting that features of this market prevent, restrict or distort competition. It therefore 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 agreed provide as comprehensive a solution 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 decided, after consultation, not to refer this market to the CC.
   
4. This is only the second time that the OFT has accepted undertakings in lieu of making a Market Investigation Reference to the CC. The undertakings were accepted under section 154 of the Enterprise Act 2002 and will be monitored by the OFT under section 162 of the same Act. The undertakings are enforceable by the OFT if parties do not comply with them.