For nearly a decade, I've been waging war against extended warranties -- the service and maintenance agreements sold alongside a wide range of consumer goods, including cars and electrical goods.
It's not that I'm opposed to warranties as such; it's simply that these protection plans are normally far too expensive, widely mis-sold, and riddled with loopholes and get-out clauses.
What is a warranty?
Extended warranties extend the consumer warranties provided by manufacturers. With one-year manufacturer's warranty compulsory in the UK, a five-year extended warranty actually adds only four years to the maker's guarantee.
Extended warranties are sold by manufacturers, retailers and other third parties, either as service contracts or insurance policies. Alas, this market is dominated by the 'point of sale' warranties sold by chain stores. If you’ve ever bought a TV or fridge at one of the big chains, the salesperson at the till will almost certainly tried to sell you an extended warranty.
In short, while extended warranties can offer valuable benefits, they are undermined by over-charging and high-pressure sales tactics. This explains why the extended-warranty market has been the subject of repeated regulatory investigation.
For example, in 2002, the Office of Fair Trading (OFT) concluded that self-regulation of extended warranties had failed, so it referred the industry to the Competition Commission. In 2005, this led to the introduction of new rules governing warranties: The Supply of Extended Warranties on Domestic Electrical Goods Order 2005.
One messy market
Despite the rules introduced seven years ago, the warranty market is still a mess. These contracts remain highly profitable for their providers, which means that they still offer poor value for money to consumers.
For example, were you to buy a £300 digital camera, a three-year extended warranty sold alongside it might cost £100. So the warranty is priced at a third (33%) of the cost of the camera, which is a very steep price to pay. This shows that either the camera itself is shoddy, or the warranty is a rip-off. In almost every case, it's the latter, rather than the former.
My advice is very simple: never buy extended warranties from retailers and car dealers -- unless, you relish being ripped off, that is. The only exceptions I've found to this rule is warranties from department store John Lewis and audio-visual retail Richer Sounds, which offer great value for money.
More protection against mis-selling
Unsurprisingly, the OFT has had another go at sorting out this market.
Last week, the OFT announced that it had accepted legally enforceable undertakings from the UK's three largest electrical retailers to improve the way the extended-warranty market works.
Dixons, Comet and Argos have undertaken to:
1. Maintain and publicise an independently operated price-comparison website for extended warranties (to be up and running by Christmas), so as to make shopping around easier.
2. Provide more easily available information via in-store leaflets and retailer websites, including pointing out the availability of alternative warranty providers.
3. Conduct regular independent 'mystery shopping' exercises to help ensure shoppers get accurate information from sales staff -- and then report these results to the OFT.
4. Provide clear on-shelf information on the yearly cost of Pay As You Go (PAYG) warranties, in order to help shoppers understand the longer-term costs of entering these rolling monthly contracts. This currently affects Dixons as the only one of the three retailers to sell PAYG warranties.
Not good enough
For me, these latest undertakings made to the OFT by Dixons, Comet and Argos are too little, too late. Indeed, as the OFT itself admits:
1. Competition is limited by the retailers' point-of-sale advantage in being able to sell extended warranties at the same time as they sell electrical items.
2. Only about a quarter of consumers shop around for extended warranties.
3. When buying an extended warranty at the same time as an electrical item, shoppers do not have enough relevant information to make an informed decision about whether the warranty offers value for money.
4. PAYG warranties can be very expensive when held for lengthy periods -- and considerably more expensive than comparable fixed-term warranties.
My personal view -- based on my 25 years in financial services -- is that these latest enforcement measures will fail, just as the new rules introduced in 2005 did. Indeed, I believe that the market for extended warranties will remain anti-competitive and distorted until these two changes occur:
1. Retailers are banned from selling extended warranties at point of sale (as has happened with single-premium PPI policies), even if for a temporary period.
2. A cap is placed on the commissions paid and profits made by these products. For example, in Australia, wide-ranging consumer protection limits this profit margin to a fifth (20%) of the price of such products.
In my view, until these two events occur, extended warranties will remain a £1 billion-a-year, predatory 'protection racket'!
Finally, if you do want this cover, then look for stand-alone plans from reputable independent providers, such as Warranty Direct. Also, you could save by buying a multi-appliance policy with a monthly premium that covers a number of appliances.
What experiences have you had when buying or claiming on extended warranties? Please tell us in the comments box below...
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