Personal Finance : Warranting a good deal

ONCE consumers looking for TVs, hi-fis and washing machines became clued up and started shopping around for the cheapest deal in town, stores started competing aggressively on price.

But people have not woken up to the terrible deals on offer on extended warranties. The Office of Fair Trading and The Consumers' Association turned their attention to this murky area last week.

For a start, there is no choice on offer once you have plumped for a machine in a particular store. Each outlet sells its own version and no other - rather like the financial services industry where most banks and building societies are tied to just one life insurance and investment company.

And again, just as in the financial arena, you are likely to be confronted by a salesman working on commission. He will try pretty hard to convince you of the merits of extending the manufacturer's guarantee for a few more years - his take-home pay may depend on it.

The OFT points out that warranties are usually mentioned by the staff at the last moment as the customer approaches the till, so they are put under pressure to make a snap decision.

Indeed, the tale of the gas showroom workers whose salaries are being cut to bring them in line with those paid by the electrical retailers (while the chief executive gets a huge increase in his already huge salary) perhaps indicates a move to match the electrical retailers and switch from salary-based pay to a greater reliance upon commission.

The cost of warranties varies hugely. For the same television, the same Cornhill waranty is given away free by John Lewis, sold for £57.99 by Argos, and offered for £150 by Dixons.

John Lewis gives away two- year warranties on washing machines, dishwashers, fridges and videos but charges for five-year cover.

It says that, like its credit card, warranties are not designed to make super profits but are a service to customers pitched at a price to cover costs.

While Dixons charges £110 for a five-year warranty (one year from the manufacturer plus four more) for a hi-fi costing up to £500, Richer Sounds charges £9.99 each for cassette decks, tuners and amplifiers and £19.95 for compact discs. James Johnson-Flint, the managing director, says that the stores make a profit on the deals at those prices.

The OFT is talking about drawing up a code of conduct and is urging stores to display the cost of warranties more prominently in the shops, and to make available details of competing warranties sold by other insurers.

If these insurance companies had greater access to consumers, real competition might break out.

The OFT heard tales that manufacturers' guarantee cards were being removed from product packaging to eliminate competition for their own extended warranties. However, it appears that this practice became less prevalent once it became known that the inquiry into warranties was under way.

The problem with warranties is that they usually only cover the period when it is highly unlikely that anything will go wrong.

My guess is that the keen prices of some goods depend on a cross-subsidy from the expensive warranties. So those who take the risk and do not take out the warranty get cheap prices at the expense of those who do.

But it is impossible not to support a shake-up on warranties even if it means "real" prices for both parts of the deal.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

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