Stores face probe into warranties

AN INQUIRY has been launched into 'hard sell' extended warranties on electrical goods. This follows concerns that High Street retailers are overcharging shoppers for the policies, which are worth £500m a year and generate big profits for chains such as Dixons and Comet.

Five million policies are sold each year and customers are often cajoled into buying them by salesmen keen to earn commission. The Office of Fair Trading has asked the Competition Commission to investigate what it believes may be a complex monopoly.

Shares in Dixons fell 4.6% on the news, wiping millions of pounds off its value, while those in Kingfisher, which owns Comet, dropped 3.6%.

An OFT study has found that an extended warranty on a £300 washing machine could cost between £150 and £170. A policy for a £400 washerdryer could cost up to £250 - effectively a 62% mark-up. And cover for a mini-disc recorder selling for £180 could be as much as £130.

But the Consumers' Association recently discovered that the average cost of repairs to a washing machine over five years is only £38, well below the cost of a warranty for the same period. Repairs on a TV were £44 against a warranty cost of £200.

Sales of warranties often generate bigger profits than the electrical goods themselves because the number of claims made is very low compared with other policies.

The OFT said yesterday that better deals are available from manufacturers or general insurance companies. It also found that the services of independent repairers are better and cheaper than those offered under warranties.

News of the inquiry was welcomed by the Consumers' Association, which questioned the value of buying extended warranties at all. Shoppers should be protected by the Sale of Goods Act, which is supposed to cover those who buy faulty goods for up to six years after purchase. But High Street electrical retailers have routinely failed to honour this by insisting that shoppers have no rights beyond a year from purchase.

Dixons condemned the inquiry as 'inappropriate' and 'unjustified'. The company said its warranties are backed by unrivalled after-sales service. Comet said: 'We take pride in the belief that our warranties offer customers complete peace of mind and value for money.'

The OFT referred warranty sales to the Commission after firms failed to honour a voluntary code of practice. The Commission can order a mandatory code, under which companies could be fined. It can also order the separation of warranty sales from electrical goods sales to encourage consumers to shop around.

OFT director-general John Vickers said: 'In many cases, buying an extended warranty is an after-thought. Consumers do not shop around and they are not well placed to make informed choices. Some consumers felt they were subject to pressure.'

A spokesman for Asda, which offers a free guarantee on electrical items, said: 'Expensive extended warranties are simply a marketing ruse designed to dupe customers. Products are becoming more and more reliable, making the policies themselves expensive white elephants.'