Tough new rules that could be implemented by the Financial Conduct Authority (FCA) look set to impose significant additional burdens on van and truck dealers who sell warranties. That is the warning issued by MB & G Insurance Services Managing Director, David Brock.
What he has in mind are widely-used so-called ‘obligor’ warranties.
Administered by a warranty company, they are not backed by insurance themselves. Instead, it is the dealership selling them that is insured, and it is the dealership’s policy that meets any claims made by customers.
Insurance-backed warranties can only be sold by vendors who are either FCA-approved or the appointed representatives of a firm that is itself approved. Approval involves a considerable degree of legal compliance, training and record-keeping.
Obligor warranties fall outside this net, says Brock, because they are viewed as service agreements and as a consequence are not regulated by the FCA and the Financial Ombudsman Service. He believes, however, that the FCA would like them to be treated in much the same way as insurance-backed warranties, although in his view that would mean more costs and complications for dealers.
“Effective compliance management will be a heavy burden for small dealers in particular because they don’t employ the back-office staff that will be necessary,” he says. If they hire more employees to deal with the extra administration then that will mean selling warranties will become less profitable.
Obligor warranties may also become more expensive for customers to purchase, he believes, although it should perhaps be pointed out that the higher price could net them additional benefits.
Because it is the dealer who is insured rather than the customer the latter can find it difficult to make a claim on an obligor warranty if the former goes out of business. If the regulations change in the way Brock suspects they may however, then the underwriter may be obliged to offer clients of a dealer who has gone out of business prompt redress if they need to make a claim.
“The insurer may be viewed as being responsible for the whole supply chain and that could result in the premiums paid by dealers rising by between 10% and 20%,” Brock suggests.
If the FCA is looking for a model to follow so far as obligor warranties are concerned then it may decide to look across the Atlantic, says Brock. “Service agreements are common practice in the USA but over there they come under regulatory control,” he observes.
One advantage of obligor warranties is that VAT can be recovered on claims, Brock says. That is much harder with insurance-backed warranties he adds, pointing out that they are also subject to Insurance Premium Tax.
Will Dealers Continue Selling Warranties?
So will dealers abandon the sale of warranties if new regulations bite? Possibly not – because they can be remarkably profitable.
“There’s no denying that they offer a very decent gross margin,” says one senior figure in the warranty industry. “It can range from 30% at the lower end of the spectrum to as high as 70%, with most vendors making between 40% and 50%.”
However, paying the wages of an additional employee – who may of course handle other tasks alongside warranty administration – will soon eat into these margins. As a consequence dealers under pressure may decide to adopt another approach, Brock suggests.
“What they may do instead is forge links with a warranty provider who runs a telesales operation,” he says. “The dealership will sell the customer a van or truck and tell them the provider will telephone them to discuss a warranty.”
If the customer buys one then the dealership will earn a referral fee – not as profitable as selling the warranty itself, granted, but much less onerous so far as administration and compliance are concerned.
Some bigger dealerships sell insurance-backed warranties alongside other insurance products – gap cover for example – as well as finance. They are already regulated by the FCA so tighter rules governing obligor warranties will make no difference to them.
What Are the Options?
Aware that some dealers worry that they might struggle to comply with the demands imposed by the FCA, WMS Group can offer a warranty that, for the present at least, falls outside the FCA’s remit. “It’s one we stand behind ourselves rather than one that’s underwritten by an insurance company,” says commercial vehicle specialist, Mark Bobbins.
“Otherwise it’s no different to an FCA-regulated product, and we run both types of warranty in parallel with one another,” he adds.
Offering a warranty that it stands behind means that WMS Group itself has to be regulated by the FCA and have sufficient ring-fenced funds available to meet any claims, he explains. The dealer who sells this type of warranty does not have to submit to regulation however, says Bobbins.
Fears about the burden regulation can imposed are exaggerated, he contends.
“It’s not as onerous as people may think once you’ve got the necessary processes in place,” he insists. “If the FCA decides to tighten things up then I don’t think that will be a problem.”
“Remember too that because we are compliant with FCA requirements then dealers can act as our appointed representatives,” he adds.
Commercial vehicle warranty sales are healthy so far as WMS is concerned, he reports.
“The truck side of the market is particularly buoyant at present,” he says. “In fact, I’ve never been busier.”
WMS can warrant commercial vehicles for up to three years with limits ranging from £1,000 (£150 for vans) per claim to the vehicle’s current market value.
Coverage can extend from key components (engine, gearbox and so on) to all mechanical and electrical items provided that they have not been modified and are not specifically excluded under the policy. It all depends on the level of cover the dealership selects, and that will depend on the age and type of vehicles it sells, and its target market.
Being able to offer a warranty can be a handy marketing tool if a customer needs reassurance that a safety net is in place should something go wrong with their acquisition.
Bear in mind that selling warranties could result in extra business for the workshop if a claim is made. If a gearbox needs swapping under warranty then your technicians may end up handling the task, and that spells incremental revenue for your business.