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Major changes to extended warranty market

Wednesday 8th February 2012

Major UK electrical retailers have offered legal undertakings to improve the way the extended warranties market works, the Office of Fair Trading has announced.

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

This follows an OFT market study on extended warranties, which highlights competition concerns in the £1billion per year market that could mean consumers are not getting the best value for money.

As a result of the OFT's concerns, Dixons, Comet and Argos, the largest retail providers of extended warranties, have offered undertakings which the OFT will now consult on whether to accept, instead of referring the market to the Competition Commission for a detailed investigation.

The OFT's market study found that, despite some improvements in the market including some lower prices, several competition concerns remain. In particular:

* Competition remains 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, which remains low compared to many other insurance products;
* 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;
* Pay As You Go warranties, where shoppers pay for a rolling monthly contract, can be very expensive if held for lengthy periods and can be considerably more expensive than comparable fixed-term warranties.

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

* Establish, maintain and publicise an extended warranties comparison website, to make shopping around easier;
* Provide more accessible information via in-store leaflets, including on the availability of alternative providers;
* Conduct regular independent mystery shopping exercises to help ensure shoppers get accurate information from sales staff - and report back to the OFT on the results;
* Provide clear on-shelf information about the annual equivalent prices of PAYG warranties to help shoppers understand the longer term costs of those products. This currently affects Dixons, which is the only one of these three retailers to sell PAYG warranties.

Ann Pope, Director in the OFT's Goods and Consumer Group, said: "Millions of extended warranties are sold in the UK each year and we remain concerned that, despite recent improvements, this market does not work as well as it could for consumers. We welcome the retailers' initiative in offering undertakings and we now want to hear from consumers and others whether they think these will lead to improvements.

"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.

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Mike Jones

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