OFT warns retailers must improve extended warranty deals

8th February 2012

Three major UK electrical retailers have offered legal undertakings to the Office of Fair Trading to improve the way they sell extended warranties. It's the result of a consultation announced last April – and it's the third major look at the hows and whys of buying extra cover in a decade. 

The study – see the OFT market review page for full details – does not go far enough, according to PC Pro. It argues that while consumers are still getting a rough deal on extended warranties, the OFT has refused to refer leading the retailers involved to the Competition Commission.

The retailers are Dixons (trading as Currys and PC World), Argos (part of the quoted Home Retail Group) and Comet (sold for £2 to a private equity company in November 2011). Other retailers sell the plans but these three account for a large slice of the market.

Selling extended warranties is profitable – at one time, Dixons made more from the plans than it did from selling electronic goods. And it is easy – marketed at point of sale offering "peace of mind if anything goes wrong" without any competition – the premiums offer substantial additions to electrical goods margins.

For instance, Argos, which calls its extended warranty "Replacement Product Care" stretches the basic guarantee from one year to three years on price-related basis. It charges an extra 20 to just over 25% to cover those two years. A £40 iron costs £10.99 extra while a £149 model comes with a £29.99 premium.

On more complex products, prices are higher. A £149 home cinema system costs £43.99 in product care while going from one year to three on an £1099 TV set involves an extra £224.99.

Investors in these companies need to weigh up the results of losing business as a result of the agreed reforms against the chances of increasing business due to the generation of additional trust.

The promised measures include improving the information these retailers provide to shoppers and the launch of a comparison website.

The OFT found several concerns despite some improvements including some lower prices. In particular:

To address these concerns, Dixons, Comet and Argos have agreed to: 

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

'If these undertakings are accepted by the OFT it would allow us to address the competition concerns more quickly and also reduce the burdens of further, detailed investigation.' The OFT expects to reach a final decision on whether to accept the undertakings later this Spring.


More from Mindful Money:

Glencore and Xstrata: Do mergers work?

Is cybercrime good news for investors?

The rise of peer-to-peer lending

To receive our free email newsletter sign up here.

Leave a Reply

Your email address will not be published. Required fields are marked *