Article from Motor Trader , Thursday 26th January 2017, John Kirwin.

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Increased regulation of added value services like used car warranties is seen by most as simply inevitable.

However, the scale of the current [FCA] review and the potential impact for the industry may come as an unpleasant surprise.

Commonly known as “obligor”, circa 80-90% of all used car warranties are service agreements and not normally regarded as insurance.

This lets motor dealers work outside of the direct control of the Financial Conduct Authority and the Financial Ombudsman Service in relation to warranty sales.

The loophole exploited is the so-called “connected-contract”, but it is not just a regulatory issue.

It is also an opportunity to recover VAT on claims, something much harder to do with insured schemes where IPT applies.

The FOS complains it cannot manage customer complaints for service agreement or warranty schemes.

The FCA, and FSA before it, repeatedly argue that these are in fact insurance.  The retail industry has so far managed to win the counter-argument.

The FCA and FOS are currently in joint investigation into “connected-contracts”.  Whilst the initial feedback is not expected until late spring, the impact is likely to be significant.

More importantly there is a model the FCA can refer to.  In the USA, service agreements are also common practice, but there they come under regulatory control.

Whilst it is unlikely that all service agreements will be abandoned in favour of insured schemes, it will mean the introduction of substantially stiffer regulation and compliance requirements.

Effective compliance management will be a heavy burden for dealers, especially those with few back-office and administration staff.

There are solutions to mitigate the effects but the impacts cannot easily be avoided.  Moreover, the massive increase in FCA pressure being brought to bear on the insurers will mean traditional methods of mitigation will not be available. Challenging times ahead.

David Brock is managing director of MB&G Insurance Services