MONEY COMMENT
Clampdown On Costly Extended Warranties

By Cliff D'Arcy
December 19, 2003

It's been a busy week for financial services companies, with several government-commissioned reports making headlines. Sadly, it's been nothing but bad news for these firms, with highly critical reports published on new-car warranties and credit cards. Now, extended warranties have come under fire in a damaging report from the Competition Commission (PDF file).

What are extended warranties?

Many consumers buy extended warranties alongside items such as electrical goods, cars and other products in order to protect themselves against breakdown costs. For a price, a retailer, manufacturer or insurance company will pick up repair bills during a specified period. The most popular warranties cover washing machines, dishwashers, televisions and so on.

Although all electrical items come with a minimum one-year manufacturer's guarantee, extended warranties are sold with around one in five electrical items. Some are insurance policies, underwritten by insurers; whereas others are written as 'service contracts' in order to avoid insurance premium tax.

Over three thousand retailers supply extended warranties, but four out of five (80%) are sold by just five chains: Dixons (LSE: DXNS) (Dixons, Currys, PC World and The Link), Comet, Powerhouse, Argos and Littlewoods. A staggering 18½ million warranties were sold in 2001, earning retailers, manufacturers and insurers a cool £900m. It sounds like a lucrative market to be in!

Sounds good, where's the catch?

There are several snags:

1. It's cheaper to pay for repairs as you go, rather than buy a warranty.
2. Consumer goods are becoming increasingly more reliable, thus the premiums you pay far outweigh the true cost of repairs.
3. Some retailers use 'hard sell' techniques to force unwanted warranties on unsuspecting customers.
4. The cost of a warranty can come to more than half of the cost of the goods, with shop-bought warranties being the most expensive.
5. Warranty Direct claims shop-bought warranties are almost two-fifths (38%) more expensive than policies bought from manufacturers, insurers or other outlets.
6. There is very little price competition, because retailers have 'privileged access' - in other words, they have a captive audience!

What are the Competition Commission's recommendations?

Retailers should:

1. Display the cost of the warranty alongside goods, both in-store and in all advertising.
2. Give you a standard leaflet that sets out your statutory rights, including cancellation rights, explains that warranties are available from other sources, and confirms whether you are buying a service contract or underwritten insurance policy.
3. Allow you to cancel a warranty and receive a full refund within 45 days of your purchase, if you haven't made a claim. If you cancel after this, you should receive a pro-rata cash refund.
4. Offer you a warranty on the same terms for thirty days after you've bought an item, including any point-of-sale discount aimed at persuading you to buy a warranty on the spot.

The Department of Trade and Industry has accepted the Competition Commission's findings, so expect these new regulations to come into force soon.

In summary, our advice would be to shop around or go without. Instead, be your own insurer by building an 'emergency cash fund' to pay for everyday repairs. By the way, if you're worried about accidental damage or theft, don't be, as most goods should be covered by your household contents policy. If not, you could increase your contents cover at little extra cost.

More: Just Say No To Extended Warranties | Extended Warranties Under Investigation.