Extended warranties

This is Information Sheet 198 (INFO 198). It deals with extended warranties and how they fit into the regulatory regime under the Corporations Act 2001 (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (ASIC Act). It contains information previously included in QFS 35 Do I need an AFS licence to issue or distribute extended motor vehicle warranties? (now withdrawn).

This information sheet covers:

• what an extended warranty is
• when an extended warranty is likely to be treated as a ‘financial product' and when the 'incidental product' exemption may apply
• who will be involved in the issue and distribution of extended warranties and when those persons will need to be covered by an Australian financial services (AFS) licence, and
• consumer protection provisions that are relevant to the sale and marketing of extended warranties.

What is an extended warranty?

An extended warranty is an arrangement under which a customer pays a fee in return for another person (the warranty provider) agreeing to repair or replace (or cover the cost of repairing or replacing) parts or components of goods in the event of defects in, or failure of, those parts or components.

Providers of extended warranties generally describe these products as offering additional coverage to existing warranties (such as ‘warranties against defects’ given by manufacturers with new goods) or consumer guarantees contained in the Australian Consumer Law. This may not always be the case, and businesses need to be careful they are not misleading consumers about the benefits of an extended warranty.

The Australian Consumer Law is contained in the Competition and Consumer Act 2010, which is administered by the Australian Competition and Consumer Commission (ACCC). Consumer guarantees and warranties against defects described in the Australian Consumer Law are not financial products. For more information, see ‘Do consumer protection provisions apply?’ below, and the ACCC’s website.

When is an extended warranty a financial product?

Customers generally acquire extended warranties to minimise the costs to them if the goods break down or develop a problem during the period covered by the extended warranty.

Extended warranties are generally financial products because they are facilities through which customers manage financial risks: section 763A and section 763C of the Corporations Act and section 12BAA(1) and (5) of the ASIC Act.

Depending on the circumstances, an extended warranty may amount to a contract of insurance: section 764A(1)(d) of the Corporations Act and section 12BAA(7)(d) of the ASIC Act. For example, the warranty is more likely to be insurance if:

• it is provided by a third party to the sale of the goods, rather than a person who has an existing responsibility for the quality of the goods (such as the manufacturer, retailer or other distributor of the goods)
• the customer is entitled to the benefits described in the warranty if they have a valid claim, rather than only a right to have their claim considered
• it covers additional costs or losses that do not result from defects in, or failure of, the goods and that are beyond the control, or not the responsibility, of the retailer or manufacturer (such as accidental damage or theft)
• it covers normal wear and tear.

You should obtain your own legal advice about whether a particular extended warranty amounts to a facility to manage a financial risk and/or a contract of insurance.

If you offer an extended warranty that is a contract of insurance, you will need to be authorised to carry on insurance business under the Insurance Act 1973. That Act is administered by the Australian Prudential Regulation Authority (APRA).

Are there any exemptions?

In some limited circumstances, extended warranties will not be financial products for the purpose of the Corporations Act because of the ‘incidental product’ exemption in section 763E of that Act. This exemption does not apply when the extended warranty is a general insurance product.

We consider that the incidental product exemption will generally not apply to extended warranties that are issued by a person who does not have any other interest in, or control over the quality of, the goods that are the subject of the warranty (i.e. it will generally not apply to third-party warranty providers).

The incidental product exemption is more likely to apply to extended warranties issued by the manufacturer, retailer or other distributors of the goods. However, the application of the exemption will depend on the particular circumstances, including the terms of the extended warranty and the circumstances and manner in which it is offered to customers.

You should obtain your own legal advice about whether a particular extended warranty is covered by this exemption.

We have provided some examples in Table 1 to illustrate circumstances in which it may be more or less likely that the incidental product exemption will apply. These examples are not exhaustive and are not intended to imply particular rules about how this exemption operates.

Table 1: Examples of when an extended warranty may be covered by the incidental product exemption

 

Scenario	Covered by the exemption?	Explanation
Manufacturers’ extended warranties You are the goods manufacturer and you issue an extended warranty to the purchaser at the time of sale of those goods. The extended warranty only covers the repair or replacement of the goods or parts of the goods (and not loss unrelated to the quality of the goods or parts).	Likely to be covered by exemption	The extended warranty is more likely to be incidental to the goods, and ensuring the goods purchased by the consumer are of a particular quality. However, the exemption is less likely to apply where one or more of the following features are present: the warranty provides cover for losses or expenses not related to the quality of the goods the customer is able to choose between different levels of coverage the warranty is applied for and issued to the customer some time after the sale of the goods. If one or more of these circumstances exist, the extended warranty may not be merely incidental to a facility such as the sale contract. The customer is more likely to make separate and deliberate purchasing decisions in relation to both the goods and the extended warranty. It may also not be reasonable to assume that the main purpose of the extended warranty (considered together with the sale contract) is to ensure that the goods being purchased are of a particular quality, rather than to manage a financial risk to the customer.
Third-party warranty providers You are a third-party warranty provider and you issue an extended warranty to a customer who purchases goods from a retailer. The extended warranty is distributed by the retailer on your behalf.	Unlikely to be covered by exemption	As you do not have any interest in the goods other than as a result of the extended warranty, an extended warranty issued by you will generally not be merely incidental to another facility such as a sale contract. The customer is more likely to make a separate and deliberate decision about purchasing the extended warranty from you, and to purchase it to manage financial risks. Depending on the terms of the warranty, the warranty may be a general insurance product. If it is, the incidental product exemption will not apply.

 

Who provides financial services in relation to an extended warranty?

Warranty providers

The warranty provider is the person who is responsible for obligations owed to the customer under the terms of the warranty.

If the extended warranty is a financial product, the warranty provider will be providing the financial service of issuing the extended warranty. Extended warranties are usually issued by either:

• the manufacturer, retailer, importer or other distributor of the goods (i.e. a person who has control over or responsibility for the quality of the goods that are the subject of the warranty), or
• a third-party warranty provider (i.e. a person who does not have control over or responsibility for the quality of the goods that are the subject of the warranty).

Distributors

A distributor of an extended warranty has a role in offering customers warranties issued by another person, and arranging for the customer to acquire the warranty. Distributors are likely to be providing financial services of arranging for other persons to deal in the extended warranty (i.e. for the customer to apply for and acquire the warranty, and for the warranty provider to issue the warranty) and providing financial product advice.

Who needs to hold an AFS licence?

If you provide these financial services, in most cases you will either need an AFS licence with appropriate authorisations, or you will need to be an authorised representative of an AFS licensee with appropriate authorisations.

You will need to consider which AFS licence authorisations are appropriate for your particular circumstances and, where necessary, obtain your own legal advice.

When considering which authorisations are required, you should think about whether the extended warranty is a general insurance product or not. An AFS licence authorisation for general insurance products will not also cover financial services in relation to non-insurance extended warranties. If you provide financial services in relation to both kinds of extended warranties, your AFS licence should cover both general insurance products and ‘miscellaneous financial risk products’.

We have provided some examples in Table 2 to illustrate different ways in which extended warranties are commonly issued and distributed, and who is likely to need an AFS licence. These examples are not exhaustive and are not intended to imply that these are the only ways in which the licensing provisions will apply.

Table 2: Common structures for the provision of extended warranties

 

Scenario	Who needs to hold an AFS licence?
Third-party extended warranties A third-party warranty provider uses retailers of goods to distribute extended warranties to their customers.	The warranty provider issues the extended warranty and is likely to need an AFS licence. If the warranty is a contract of insurance, the provider may also need an authorisation from APRA to carry on insurance business. The retailer acts on behalf of the warranty provider to distribute the warranty to customers. The retailer could do this as an authorised representative of the warranty provider.
Administration of extended warranty programs A third party provides an extended warranty ‘package’ to retailers, under which: the retailer is the warranty provider the third party may indemnify, or otherwise cover, the retailer for any losses or liabilities under the warranty the third party may provide claims handling and administrative services.	The retailer issues the warranty. Whether the retailer will need to hold an AFS licence will depend on whether the ‘incidental product’ exemption will apply to the warranty in the circumstances in which it is sold: see Table 1. If the extended warranty is a financial product (e.g. because it is sold at some time after the sale of goods), the retailer is likely to need an AFS licence (unless it is able to rely on an exemption from the requirement to hold a licence). By providing an indemnity, or other cover for losses under the warranty to the retailer, the third party may also issue a facility for managing financial risks to the retailer. The third party is likely to need an AFS licence that authorises it to issue this product to the retailer. If that indemnity is a contract of insurance, the third party may also need an authorisation from APRA to carry on insurance business.

 

Do consumer protection provisions apply?

Consumer protections provisions are set out in:

• Division 2 of Part 2 of the ASIC Act
• the Australian Consumer Law.

Under the ASIC Act, most extended warranties are likely to be financial products. The ‘incidental product’ exemption does not apply to the definition of ‘financial product’ in the ASIC Act.

Deferred sales model

An extended warranty may be an ‘add-on insurance product’ to which the deferred sales model under the ASIC Act applies if the extended warranty either:

• is a 'contract of insurance', or
• provides for the customer to benefit from a contract of insurance to which the provider of the financial product is a party.

See Regulatory Guide 275 The deferred sales model for add-on insurance (RG 275) for detailed guidance on the deferred sales model.

Misleading or deceptive conduct, and false or misleading representations

The consumer protection provisions under the ASIC Act and the Australian Consumer Law prohibit misleading or deceptive conduct and making false or misleading representations in relation to the supply or promotion of financial services and the sale of goods.

Consumer guarantees

The Australian Consumer Law also sets out consumer rights that are called ‘consumer guarantees’. These guarantees mean consumers are entitled to certain remedies if there is a problem with their goods or services. Remedies for goods may include a repair, replacement or refund and, in some cases, compensation for damages and loss.

These guarantees are not financial products. However, persons who provide and distribute extended warranties need to:

• be aware of the protections that are provided by the consumer guarantees
• ensure that during the sale and marketing of extended warranties they do not misrepresent the consumer’s rights under the consumer guarantees, or lead the consumer to believe that they need to pay for rights they already have under the guarantees.

Misrepresentations about the consumer guarantees, and the benefits of an extended warranty compared to these guarantees, during the sale or promotion of an extended warranty may involve a breach of the ASIC Act provisions, the Australian Consumer Law provisions, or both.

Good practices

The following practices may help you reduce the risk of misleading consumers:

• Be specific about each of the benefits provided under any extended warranty, particularly where they may overlap with the consumer guarantees, and advise consumers of the benefits this provides above and beyond their statutory rights.
• Review how these warranties are marketed and what information is provided to consumers by sales staff at the point of sale. This is to ensure that you are not exaggerating the benefits that an extended warranty may offer consumers and so misleading consumers about their consumer guarantee rights and the value of the extended warranty.
• Do not overstate the risk that consumers face by not purchasing an extended warranty, such as the likelihood of the product breaking down.
• Do not overstate the financial benefit of purchasing an extended warranty. This includes not creating unnecessary anxiety for consumers about the cost of repair, or the likely time or financial cost involved in bringing a claim in the relevant court or tribunal.
• Do not overstate the non-financial benefits of an extended warranty, such as peace of mind.

Where can I get more information?

You can:

• go to the Federal Register of Legislation to read the Corporations Act, ASIC Act and the Australian Consumer Law
• check the latest information about financial services or download copies of ASIC regulatory guides
• go to www.accc.gov.au/consumers for information on the Australian Consumer Law and consumer guarantees, or contact the ACCC Infocentre on 1300 302 502
• call ASIC on 1300 300 630 or ask a question online.

Important notice

Please note that this information sheet is a summary giving you basic information about a particular topic. It does not cover the whole of the relevant law regarding that topic, and it is not a substitute for professional advice. We encourage you to seek your own professional advice to find out how the applicable laws apply to you, as it is your responsibility to determine your obligations.

You should also note that because this information sheet avoids legal language wherever possible, it might include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or important qualifications. In most cases, your particular circumstances must be taken into account when determining how the law applies to you.