Will electrical retailers and their warranties be regulated by the Intermediaries Directive? Brokers think they don't serve consumers well. Insurance Times' secret shopper investigates
Electrical warranty providers are in the dock. But, although brokers in the public gallery want to see them banged to rights with a sentence of full regulation, they could be disappointed.
The regulation system is already at bursting point and taking on the additional responsibility of warranties could prove too much. What is more, lobbying groups such as the British Retail Consortium could well sway the jury at the Treasury into believing things are fine as they are.
Warranties are big business. According to the Office of Fair Trading (OFT), the market is worth over £1bn. There are two main types of warranty offered by electrical retailers - insured and self-insured.
Big names on the insurer side are Allianz Cornhill, which has links primarily with retailers, and Domestic & General, which deals mainly with manufacturers. Norwich Union and AXA offer generic appliance breakdown cover. Self-insured schemes are where retailers such as Dixons put aside funds to pay claims.
So, what is all the fuss about? Electrical warranties serve a purpose. If customers understand what they are buying, do not have duplicate cover under contents insurance and buy a product that needs repairs - usually between years two and five - a warranty could be useful.
And, while insurers should have the cash to pay up no matter what, the self-insured providers should do likewise.
However, the collapse of electrical retailer Tempo proved that not all retailers do this.
Earlier this year, BBC's Watchdog revealed the company was guilty of selling on returned, faulty goods as well as heavily pushing warranties. Staff felt their jobs were on the line if they failed to sell them. In 1997, Tempo decided to stop using an insurer and provide for claims itself. When the company went under, a shocking 100,000 policyholders were left high and dry.
The OFT is currently involved in an extended warranties investigation, looking at accusations of high pressure selling, value, competition and price transparency.
The OFT's report is due out before the autumn.
Last September, secret shopping was undertaken for the OFT by Taylor Nelson Sofres. This found inconsistency in the way warranties were sold and literature displayed. Although there is a voluntary code of conduct, run by the British Retail Consortium, not all retailers follow this.
Taylor Nelson Sofres concluded: "The results of this research must cast doubts on whether the marketplace is a fair for consumers."
The Financial Services Ombudsman also has concerns. Spokeswoman Iris Baker says: "Around 10% of the total number of complaints relating to insurance we receive relate to extended warranties. Customers often find the warranty is pushed on to them with little explanation and the cost can make up a significant proportion of the transaction."
Over the next few months, warranties are set to be high on the agenda at a series of top-level meeting being held by the General Insurance Standards Council (GISC) with the Financial Services Authority and representatives from insurers and warranty providers present.
Rachel Maidment, spokeswoman for GISC, says: "When we devised Rule F42, it meant everyone who sold insurance would be regulated, including warranties. We still believe a level playing field should be imposed."
Meanwhile, brokers are fuming. Hastings-based broker Ian Mantel, who is on the GISC's smaller practitioners' committee, says: "I've great enthusiasm for this industry, but it's unreasonable that some parts of general insurance could remain unregulated."
But, are complaints against warranty providers justified?
Domestic & General sells primarily through manufacturers and smaller retailers.
Head of public affairs Lindsey Addison says: "We offer good value. On our multi-appliance policy, there is no age limit on the goods you can have repaired, for example. Service goes beyond insurance. Our policyholders have access to vetted repairers and we monitor the work. We have many satisfied customers."
Cornhill Schemes marketing manager Alastair Sambrook says: "Without an extended warranty policy consumers can face high repair costs. Typical repair costs for faulty appliances can run into hundreds of pounds. Extended warranty products cover the costs of mechanical breakdown repairs, including parts and labour."
We check out what's on offer in the high street
Insurance Times went under cover to shop for electrical items in a London House of Fraser store and in Dixons to see what staff knew about warranties. We asked Richard Mikula, principal of north London broker Topaz, for his views on the product and the sale.
Store: House of Fraser
Product: Smeg Fridge Freezer FAB32/3X Price: £1,299.99
Warranty: House of Fraser Coverplan
(supplied by Aon Warranty Group)
Price of warranty: £48, lasts three years after Smeg guarantee for two years runs out.
Secret shopper view: Sales assistant was competent and explained that while Smeg was a good make, a repair after two years could be costly. He said having the cover underwritten by Aon was a benefit.
Stuart Driver, risk and compliance manager, Aon Warranty Group:
We work closely with all our corporate partners, which include many retailers, to ensure that our products are sold correctly. We regularly assess the compliance of our point of sale procedures and verify that our customers are eligible for the warranty and are aware of the main terms of the contract.
Richard Mikula: This is an expensive item and I'd expect it to last. Dyson and Hotpoint products are now coming with longer guarantees. Five years should be the norm. At least there wasn't pressure selling as in some cases. But there was no evidence of a proposal form on display.
Product: Samsung Combined DVD Video Player
Price: £299.99 Warranty: Dixons Coverplan
Price of warranty: £99 for three years, £129 for four years and £159 five years.
Secret shopper view: Assistant tried to push the plan and inititally said it would pay out if product was lost. He was asked to check this out with a colleague after which he said this was not the case, but theft was covered. He inititally described the plan as a guarantee against repairs.
Lesley Smith, head of communications, Dixons Group: We have a ring-fenced fund governed by external trustees and audited once a year. We have about 11 million warranties held by our customers and it's very important if you buy a five-year warranty that funds will still be there to meet the needs of that warranty over the five-year period.
Richard Mikula: The policy is described as a service agreement and not an insurance plan, but does include an element of theft insurance from Cornhill. Many naive people would fall for the pressure selling techniques and end up with one of these warranties.