§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Bates.]
§ 12.19 a.m.
§ Mr. Deputy Speaker (Sir Myer Galpern)
Order. I must ask right hon. and hon. Members to leave the Chamber quietly. The hon. Lady has to carry on. It is late already and she would like to get home.
§ Miss Boothroyd
The object of this debate is to draw attention to the manner in which some guarantee companies or warranty companies operate to the detriment of motorists. I appreciate the opportunity, even at this late hour, of airing a matter which has adversely affected many motorists. I refer to people with not a lot of cash to spare who buy second-hand cars. A large proportion of them, in good conscience, also buy warranties as means of keeping their cars in a proper state of repair and in good roadworthy condition. The purchasers of second-hand cars are being taken for what I call a financial ride by a type of 1694 insurance agreement which the company selling the insurance has little or no intention of accepting when a claim is made. Further, in the situation that I shall try to outline this evening, the company did not have sufficient financial resources to meet all the claims made.
The subject falls into three main areas. First, it covers the consumer—the car owner, who is the warranty holder. The second area is the financial standing of the company selling the warranty. The third area, which is what I would question the Minister about, relates to safeguarding the public against disreputable business activities.
Thousands of people today buy secondhand cars. Many of those people, at the time of buying the vehicles, also purchase what is known as a warranty. That warranty covers the car owner against some of the costs of subsequent repairs. In fact, it is something like an insurance policy.
But problems begin to arise when the car needs repair or when a defect is noticed. Complaints have been brought to my attention because the warranty company procrastinated over so many months that even the most persistent claimant gave up pursuing his claim in exasperation and eventually settled for a small percentage of the real cost involved. In many cases the company was financially incapable of meeting the claims.
The system works something like this. Currently, a warranty company does not have to comply with existing legislation because a warranty can be sold with promotional material—that is, an oil additive or repair kit to be used in conjunction with the warranty. The arrangement of selling this promotional package places the company outside the legislation. The terms of the warranty are very precise and stipulate strict compliance with its terms. Unfortunately, the average purchaser does not appreciate that the slightest non-observance of the terms is a potential bar to his claim. He believes 1695 that, by taking such a warranty, he is in fact acting very prudently.
One national newspaper recently mentioned that there are thousands of such people. I can neither confirm nor deny that. However, I have evidence at my disposal. I am aware of well over 150 cases in which, after a great deal of time and effort, approximately half the claims were met, but only in part, and in the remainder no financial settlement has been obtained by people who firmly believed that they were insured.
Out of all the cases, it is appropriate to mention one—in fact, one of the more fortunate cases. A claim was made because of a gearbox fault. In the first six weeks the owner made 10 telephone calls to the company and wrote six letters. The company said that the car had been driven after the fault had developed. A motoring organisation was subsequently called in and it put its legal department and technical experts on the case.
Telephone calls and letters passed among all the parties concerned, but 12 months elapsed before the matter was finally resolved. At that time, in desperation, the car owner accepted an offer of about 45 per cent. of the total claim.
I refer to the company known as Revolution Oil International. It is a warranty company of which the Minister is aware. In my opinion, it has used every excuse in the book to withhold payment on claims that have been submitted to it. It has made all sorts of excuses for not meeting the claims. In some instances it has said that the oil used was used seven days too late. It has said that the service was not carried out at the precise mileage at which it ought to have been done. It has said that a certified mechanic had to attend the car. What is "a certified mechanic"? It has insisted that replacement parts did not have the manufacturer's approval. In fact, the company has used every argument imaginable to avoid its obligations under the warranty and to attempt to cheat those whom it claimed to be seeking to protect.
Let me now deal with the financing of this company. It was formed in July 1974 with a paid-up capital of £100. That was subsequently, and quite normally of course, increased to £100,000 in £1 shares. As the House will appreciate, that 1696 does not necessarily mean that at any one time it had that amount of money available to meet the claims. It eventually had to go into liquidation—that was in April of this year—and just before doing so a director of the company boasted that 70,000 warranties had been issued, at an approximate cost of £20 each, covering repairs to the value of £150. If my calculations are correct, it means that the company had a liability of £750,000. The liquidator finally indicated that there was little or nothing available to meet the claims.
Although the company was in the habit of presenting itself as an international organisation, that was not the case. The company purported to be part of an international organisation, and the first paragraph of its warranty says:Dear Warranty Holder,You are now one of the many thousands of motorists in the world taking advantage of a Revolution warranty.The implication was that an overseas company would meet the liabilities, but, as the Minister is well aware, that turned out to be a false impression. I suggest that this company had nothing like the resources necessary to function in a business at all.
Perhaps I may sum up two points. I think that it is not unreasonable to say that in using promotional material in conjunction with a warranty drawn in precise terms the company was able to operate and avoid existing provisions. Moreover, it operated, I believe with some confidence, believing that it would not have to meet its liabilities, and thereby hoping for a good rip-off from the second-hand car owner who put faith in the company.
Furthermore, and this is equally important, there appear to be few, if any, requirements to be met by a company which trades without having the financial backing to meet its liabilities. It is practising as an insurance company, without having to insure itself. I believe that this is common practice in the United States. I hope that that sort of practice will not be exported here, because I can only describe it as a total racket.
I come to my third point, which is how to proceed to prevent such rackets in the future because even now it is open to anybody to form another company with limited capital and with no liability to 1697 insure against any risks that he incurs. I shall not trespass and request new legislation—I know that I should not do that in a debate such as this—but surely it is open to me to suggest that the powers that have been given to the Director General of Fair Trading are not being exercised as stringently as they might be.
The Director General already has powers under Part III of the Fair Trading Act 1973 to seek assurances from a company that the trading practices complained of are not detrimental to the interests of the consumers, and to seek assurances of responsible future behaviour. When such assurances are not forthcoming or, if given, are subsequently broken, I understand—perhaps my hon. Friend will correct me if I am wrong—that the Director General can seek an order from the Restrictive Practices Court prohibiting the company from continuing that conduct or indulging in similar conduct. I think that noncompliance would constitute contempt of court. I do not suggest that it is the best method to deal with the current and perhaps the future behaviour of such companies, but it happens to be the best method I am able to suggest in the constrained terms of this debate.
Perhaps I might take the matter a stage further by asking the following question. Should the Director General find that the existing powers are inadequate, would not he be in a position to report on that situation and suggest what is needed in this area, with which he is so familiar? Could not he report to the Minister on what might be done in the future? Many ordinary people have made sacrifices to buy a little second-hand car to give the family some pleasure. I believe that they have been cheated and that a company has been allowed to operate in a most anti-social manner. I ask my hon. Friend for his comments and views.
§ 12.32 a.m.
§ The Minister of State, Department at Prices and Consumer Protection (Mr. John Fraser)
My hon. Friend the Member for West Bromwich, West (Miss Boothroyd) asks me to ask the Director General of Fair Trading to seek assurances. I shall draw that request to his attention as soon as I can.
My hon. Friend raises the question of Guarantees and warranties. For the sake 1698 of brevity, I shall use the word "guarantees" to include warranties. The word implies a solemn pledge, a rather solid assurance. The use of the guarantee is a well established practice for marketing and sales. When one thinks of the word one almost conjures up an image of the ribbon and the seal and all the paraphernalia of the solemn legal covenant. I am afraid that too often over the years some guarantees—by no means all—have proved to be a kind of fool's gold. It would have been a lie to say that some guarantees were not worth the paper they were written on, because some have been worth rather less, in that they have taken away the rights of consumers, rights which were conferred by common law or by the Sale of Goods Act.
I think that the commonest problem in the past was the guarantee given with a second-hand car. The fine print used to say that it was a three-month guartee in lieu of all express and implied warranties, in lieu of all statutory obligations. The guarantee was worth less than the paper it was written on and took away people's rights.
That abuse was cured as to goods in 1973, and by a statute that came into force last year was cured as to the hire of goods and the supply of services. Therefore, that problem has been resolved. It is now an offence even to pretend or to give the impression that a guarantee takes away people's basic rights.
Too often consumers fail to realise their rights under the Sale of Goods Act and amending legislation. I would emphasise that those who took the guarantees described by my hon. Friend may well still have rights against the sellers of the vehicles if the goods were not of merchantable quality, and they should see whether those rights might still be exercisable.
There are three types of guarantee—I am talking about consumer transactions, because I am sure that those are what concern my hon. Friend. First, there is the sort of guarantee given by a vendor to a purchaser on the purchase of goods or services. In consumer transactions the law is now such that guarantees like that can only add to, and cannot detract from, the consumer's rights. But the problem is that in some cases I suspect that the addition to rights which a guarantee gives 1699 —and the guarantees my hon. Friend mentioned are of this nature—is more an addition on paper than it is in reality.
Someone selling motor vehicles, oil, repair kits or domestic equipment can be a man of straw and shower his customers with guarantees and warranties but make no provision whatever for contingent liability which may arise on the guarantees. In other words, he does not act with the prudence with which an actuary would act, or with the prudence or obligation with which an insurance company would act. That is the problem there.
Secondly, there is the guarantee which is given by a manufacturer who owes no contractual duty to the possessor of goods because he did not sell them direct to the consumer. In those cases the guarantee is perhaps used as a marketing ploy. There has been very considerable concern about guarantees given voluntarily by manufacturers—so much so that the Director General of Fair Trading is looking into the matter at the moment. I can do not better than to quote from the consultative document that he recently issued. Referring to this type of guarantee, he said:Complaints about guarantees are numerous—1,397 were reported to OFT … in the first half of 1977. In general, complaints were from consumers who found that the benefits they could obtain from guarantees fell short of what they had expected: they were required to pay part of the cost of putting goods right themselves (for example, they had to pay labour, or call-out, or carriage costs); or the particular component that had gone wrong was not covered by the guarantee; or the guarantee period was of short duration and had expired; or the guarantee on goods they had received as a gift was in the name of the original purchaser and could not be transferred; or after repeated attempts at repair by the manufacturer goods were still not working properly when the guarantee period ran out.The Director General has drawn the attention of trade associations to this and has sent out a consultative document. In the context of the replies to that document, I have raised the matters which have been referred to by my hon. Friend tonight.
The third type of guarantee is that which is sold on its own. It is not sold with the product at all. It is called technically a non-product warranty scheme, where the vendor sells the guarantee without any goods at all, and the effect of doing that is that he acts as an insurer. 1700 For instance, the Automobile Association sells vehicle warranties and guarantees. It has to be covered as an insurer and there is the protection of insurance law in those circumstances.
The activity of selling guarantees and warranties is apparently confined to vehicles, and it is quite different from guarantees and warranties by manufacturers. Where the warranty is not placed on the use of the product specified by the warranty company, the company will need to have a group policy with an authorised insurer. It is, in fact, conducting an insurance business. I have received no complaints in the case of the non-product warranties which are covered by insurance law.
The crucial question—I am glad that my hon. Friend has raised it—of what constitutes insurance business and what does not is a matter for my right hon. Friend the Secretary of State for Trade. Whether a particular activity amounts to insurance business—with all the implications that that would have by way of requiring regulatory control and the protection of policy holders—is ultimately a matter for determination by the court.
I understand that the Department of Trade took the view that the business which had been undertaken by the Revolution Oil Company up to the time of its liquidation did not amount to insurance business. I understand that the legal point—some might think it is a legalistic point—is that the risks concerned could have been influenced by the company providing the cover in specifying the use of a particular product, in this case an oil additive. I say "could have been". I think it is much more a theoretical matter than a matter of reality. But it was not, in the circumstances and as the law stands, possible to provide protection to the consumer which would have been available if the company had been an insurance company.
I would not wish to suggest, in the light of complaints about Revolution Oil, that consumers should avoid taking up a warranty, whether of a non-product or a product variety. That is a matter for their choice, though they ought to give great consideration before they make that choice. But the recent Office of Fair Trading report on cars suggests that buyers of used cars would be well advised, for their protection, to deal with members 1701 of the Motor Agents' Association or the Scottish Motor Trade Association.
The mass of evidence that we have from the Office of Fair Trading and from consumer advice centres and citizens advice bureaus is that most of the complaints and most of the prosecutions are against car dealers who do not belong to those associations who do not subscribe to the voluntary code of conduct, and who are outside the voluntary arrangements which have been negotiated by the Office of Fair Trading.
Therefore, one bit of advice is to deal with a reputable trader who subscribes to the code approved by the Director General of Fair Trading. Before making expensive purchases, it is always wise to look at the advice, often in leaflet form, published by the Office of Fair Trading, giving advice on buying cars and on getting them serviced and repaired.
I am very sorry that in this case all the complaints that came to my Department came after the company had gone into voluntary liquidation. It is very often a question of the horse having bolted. But I do not underestimate the scale of the problem. I think that there was one quotation in the Sunday People which ascribed to the chairman of the company the fact that 600,000 people held warranties. My hon. Friend says that the number was 70,000. The figure of 600,000 may be an exaggeration, but, whatever the figure, it was certainly a substantial amount of business.
My hon. Friend has raised what is possibly a serious gap in the law whereby a 1702 company could circumvent the spirit and the intention of insurance law, which is intended to protect consumers, by selling a product along with a warranty, and circumventing protection and then having to make no provision for the sort of contingent liabilities which are likely to arise.
I have told my hon. Friend that the Director General of Fair Trading is already considering the subject of guarantees. I finish on this note. What I propose to do is to draw to the attention of the Director General the contents of this debate and to convey to him my hon. Friend's concern. As the matter also concerns the Department of Trade, I have already taken the opportunity of speaking to one of my fellow Ministers in that Department. I intend to look into this problem as soon as I possibly can and have discussions with that Department as well.
It is not easy to define the difference between insurance business and warranties sold with products. One knows it when one sees it, but it is very difficult to define it in legal terms. But my hon. Friend has done a valuable service in raising what may be—I say "may be"—a loophole in the law, which may have been circumvented by one company, which could possibly arise again. In the context both of the review of guarantees by the Director General and of the points raised by my hon. Friend, I certainly undertake to have those discussions.
§ Question put and agreed to.
§ Adjourned accordingly at seventeen minutes to One o'clock.