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18-011MR National Warranty Company refunds $4.9 million for poor car warranty sales incentives
National Warranty Company (NWC) will refund approximately $4.9 million to 6,367 car warranty customers because its commission incentives breached the prohibition on conflicted remuneration in the Corporations Act 2001. NWC's commissions encouraged sales staff to sell warranties at the highest possible price.
NWC sold warranties which covered car repairs. NWC sales staff had the discretion to set the price for the warranty, which was directly linked to their sales commission. The more expensive the warranty, the larger the sales commission.
In response to ASIC's concerns, NWC will refund 6,367 warranty customers the difference (including interest) between what they paid and the cheapest price at which the dealer sold that, a total of approximately $4.9 million.
221 customers will receive refunds of $2,000 or more, where the NWC warranty was sold with a substantial mark-up in price. The remaining customers will receive smaller refunds. 2,858 customers will receive a refund of $100 or less, based on the difference between the cheapest price the warranty was sold for, and what they actually paid.
'Commission models must comply with the law, and product issuers should always design their incentives in a way that promotes good consumer outcomes,' said Acting ASIC Chair Peter Kell.
The refunds apply to some warranties sold between 1 July 2013 and 28 May 2015. NWC no longer issues these types of warranties.
The refund does not affect the operation of the warranty. NWC customers can still claim under the warranty (if the claim falls within the terms of their policy).
NWC is expected to write to all affected customers about their refund in January 2018. Customers with questions about their cover should contact NWC, by email: email@example.com
ASIC acknowledges NWC's co-operation in this matter.
The Government introduced a ban on conflicted remuneration in the Corporations Act 2001 as part of the Future of Financial Advice (FOFA) reforms that commenced in 2013.
In summary, the FOFA reforms prohibit an AFS licensee paying conflicted remuneration, defined as benefits that can be reasonably expected to either influence the choice of financial product recommended to a customer or the advice given to customers.
NWC's commission structures encouraged staff to sell more expensive warranties, for example:
- If the warranty was sold for $1500 – the car dealer would earn a commission of $500
- If the warranty was sold for $2000 – the car dealer would earn a commission of $1000
The warranties were offered by Davantage Group Pty Ltd trading as National Warranty Company. It is part of the MacMillan Shakespeare Group.
ASIC negotiated this refund agreement with NWC as part of its broader inquiry into the sale of add-on products through car dealerships:
- Allianz refunds $45.6 million in add-on insurance premiums (refer: 18-008MR).
- Suncorp refunds $17.2 million in add-on insurance premiums (refer: 18-009MR)
- Swann Insurance refunds $39 million in add-on insurance premiums (refer: 17-446MR)
- QBE refunds $15.9 million in add-on insurance premiums (refer: 17-258MR)
- Virginia Surety to refund over $330,000 to add-on insurance customers (refer: 17-189MR)
In 2016, ASIC released three reports covering its review of the sale of add-on insurance through car dealers, which found that the insurance is expensive, of poor value and provides consumers very little or no benefit:
- Report 470 Buying add-on insurance in car yards: Why it can be hard to say no.
- Report 471 The sale of life insurance through car dealers: Taking consumers for a ride.
- Report 492 A market that is failing consumers: The sale of add-on insurance through car dealers.
ASIC has consulted on introducing a deferred sales model for insurance and warranties regulated by the Corporations Act 2001. ASIC released a consultation paper proposing this model last year (refer: CP 294) and will be announcing the outcome of the consultation later this year.
Consumers can find out more information about the National Warranty Company refund program by visiting ASIC's MoneySmart website. MoneySmart also has information about add-on insurance to help consumers work out if they'll benefit from these products. Consumers can also download ASIC's MoneySmart Cars app, which will help them avoid common traps and identify hidden costs when buying a car.
Editor's note 1:
This media release was updated on 18 January 2018 to reflect changes in:
- the total number of car warranty customers affected;
- the number of customers receiving refunds of $2,000 or more; and
- the date range during which the relevant warranties were sold.