Comet, Dixons and Argos have agreed to overhaul the way they sell warranties for electrical goods in response to an Office of Fair Trading investigation which found they were poor value.
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The retailers have agreed to sign legal undertakings to give more information about the cost of the products, launch a website to allow consumers to compare them and conduct mystery-shopper exercises to check the patter of shop assistants.
Consumer groups have long complained that extended warranties – which offer to fix a product if it goes wrong in return for an advance fee – are a rip-off. Of particular concern are Pay As You Go warranties with rolling monthly contracts, which are far more expensive than comparable fixed-term warranties.
The OFT found that competition in the £1 billion-a year market was limited because most of the warranties were sold to customers at the time they bought electrical goods, with only one quarter of consumers shopping around, a much lower proportion than for other insurance policies.
The OFT added that the stores gave shoppers too little information to allow them to make "an informed decision" about whether the product was value for money.
"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," said Ann Pope, director of the OFT's goods and consumer group. "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."
By this spring, the three retailers are expected to sign agreements agreeing to establish, maintain and publicise an extended warranties comparison site to make shopping around easier; provide in-store leaflets making consumers aware that they can buy the products elsewhere; and conduct regular independent mystery shopping to ensure their sales staff are giving out accurate information – and report the results back to the OFT.
They also agreed to provide clear information about the annual equivalent prices of Pas As You Go warranties, though currently Dixons is the only one which sells them.
The consumer group Which? welcomed the changes but urged retailers to provide better value products in the first place. Its executive director, Richard Lloyd, said: "Which? is pleased that the OFT agrees with us that extended warranties do not offer the best value for money. Our research highlights that many of the warranties on offer today are worse value than ever before and ignore the fact that appliance reliability has improved significantly. We want to see better products at reasonable prices and for people to feel clear about what they are buying."
He added: "Providing more accessible information in-store will not... solve the problems with extended warranties and we look forward to seeing the results of the consultation period over the next few months."
The Financial Ombudsman upholds two-thirds of the 900 complaints it receives about warranties annually.
Following an OFT investigation into the warranties in 2001, the Competition Commission ordered retailers to give shoppers more information about the warranties and to allow them to be cancelled.