Leaked letter shows suppliers have been warned of investigation

The Office of Fair Trading (OFT) will ask the Competition Commission to investigate extended warranty suppliers under the Fair Trading Act 1973, accusing them of running a monopoly.

The OFT is close to completing its investigation into the domestic electrical goods extended warranty market. This is dominated by chain stores such as Dixons and Currys.

It launched its "wide-ranging examination of the market" last October, and said this week the results were likely to be released next month.

However, Insurance Times has obtained a copy of a confidential letter from the investigation team leader David Pryke to warranty suppliers, warning them of the commission's impending involvement.

The Competition Commission and extended warranty suppliers themselves, as well as the Department of Trade and Industry and the Treasury, are the only groups that know of the OFT's decision at present.

The investigation found insurers were unable to compete fairly with existing warranty suppliers.

In his letter, Pryke gives a damning report of the extended warranty sellers market, accusing warranty suppliers of parallel behaviour, ineffective competition, barring new suppliers and inadequately protecting consumers.

The letter said: "The director general of fair trading takes the view that further investigation of the sector is justified and in the circumstances he is minded to make a reference to the Competition Commission."

It said there was "little variety in the types of extended warranty offered for sale", with the cost of warranties failing to reflect the risk of failure of individual products.

Pryke wrote that the direct contact electrical retailers had with consumers stymied competition from manufacturers and direct insurers.

There were inadequate levels of consumer protection, the letter noted.

"It is difficult for consumers to compare different policies," it said.

"Furthermore, the move in recent years away from insurance-backed extended warranties to service contracts has weakened consumer protection."

Pryke gave recipients of the letter until 1 July to send their comments to the OFT.

The electrical goods extended warranty market is fast-growing, having grown in value from £650m to £1bn in the past eight years.

Although most major retailers claim to follow a code of sales practice, a mystery shopping study by the OFT found they fell "well short" of the standards laid out by the code.