Hefty commissions reveal why car dealers push extended warranties

Refunds of $5m will be paid to more than 6000 customers.

  • Car dealers could set prices for extended warranties as high as they like
  • Latest ASIC enforcement action brings refund total to $125m

Extended warranty prices were arbitrarily set as high as possible by car dealerships so that they could be paid as much as $1000 or more in commissions.

The National Warranty Company (NWC) did not have a cap on the price of its extended warranties, an investigation by the Australian Securities and Investment Commission (ASIC) has revealed. Instead, car dealerships would set the price at whatever they believed a shopper would pay, and the higher the price, the more commission they would earn.

Now the company will refund $4.9 million to 6367 customers at the direction of the corporate regulator, after its warranties were sold at inflated prices for nearly two years until May 2015.

If a warranty was sold for $1500, car dealerships would be paid $500 in commission. If it was sold for $2000, the commission paid would be $1000.

Commission payments have come under heavy scrutiny as of late, particularly in the banking and finance sector. "Product issuers should always design their incentives in a way that promotes good consumer outcomes," says Peter Kell, acting chair of ASIC.

ASIC says 221 customers will be paid refunds of $2000 or more where the warranties were "sold with a substantial markup". A further 2858 customers will receive refunds of $100 or less, while the remaining 3288 customers will receive a refund payment somewhere in between.

The announcement follows landmark fines issued by the corporate regulator against insurers selling add-on products through car dealerships. Earlier this week, ASIC ordered Allianz and Suncorp insurance to refund $60 million to nearly 110,000 people for selling add-on products that were of "little to no value".

The enforcement action brings the total value of refunds for add-on insurance products to nearly $125 million since ASIC conducted its review of the category in 2016.