14 August 2017

ACCC to put the brakes on non-compliance in new car retailing

This article was written by Melissa Monks and Ben Wighton.

On 10 August 2017 the ACCC released a draft report of its market study into the new car retailing industry (Report) following 12 months of investigation.

The review was prompted by concerns of the ACCC and fair trading agencies about issues in the industry, with around 10,000 complaints received about new car manufacturers over the past couple of years. The ACCC has power under section 28(1)(c) of the Competition and Consumer Act 2010 (Cth) to conduct research in relation to matters affecting the interests of consumers. 

The Report focusses on present competition and consumer issues within the new car retailing industry whilst also looking forward to emerging trends of non-compliance and potential issues with the arrival of new vehicle technologies.

Drive away message

The overarching message from the Report is that the ACCC considers there to be prevalent and widespread issues in the new car retailing industry and associated markets that need to be addressed through legal reform and enforcement action. The ACCC’s key observations are that:

  • consumers are finding it difficult to enforce their consumer guarantee rights under the Australian Consumer Law (ACL);
  • consumers are not receiving accurate information about their new cars’ fuel consumption or emissions performance; and
  • independent repairers are experiencing difficulties gaining access to technical information and data necessary to repair and service new cars.

The observations from the Report are not surprising – they come during a year where the ACCC has already taken enforcement action against a number of car manufacturers including Ford, Holden and Audi in relation to alleged non-compliance with the ACL of this nature and there are at least 5 class actions on foot against car manufacturers. They are also consistent with wider and increasing scrutiny by regulators of “add-on insurance products” including extended warranties.

Manufacturers/dealers should repair their policies and practices

The Report and the ACCC’s media comments about it are a warning to manufacturers and dealers that the ACCC is committed to further enforcement action to ensure that complaint handling systems, policies and practices in the industry comply with the ACL.

In light of the findings and recommendations in the ACCC’s draft Report, new car manufacturers, dealers and other industry participants would be well advised to consider their pre-sale, point of sale and post-sale practices, with a particular focus on:

  • ensuring that complaint handling policies and procedures deal clearly and appropriately with consumer complaints (particularly warranty assessments, consumer guarantee issues and other misleading conduct allegations) – reliance on a global policy may not be enough. Check also on the types of complaints received to date and whether any give rise to the specific issues raised by the ACCC. If so, act quickly to resolve them, although carefully consider the use of any non-disclosure agreements (NDAs) which the ACCC considers may itself raise issues;
  • training to ensure that all staff that interact with consumers are clear on the ACL obligations and the representations that they can and can’t make, particularly with regard to the interaction between voluntary manufacturer warranties (voluntary, commercial), extended warranties (voluntary, commercial) and the consumer guarantees (mandatory, statutory); remedies available to consumers for breach; and the ability to have non-authorised dealers undertake repairs;
  • ensuring that all representations about vehicle performance (including fuel consumption and vehicle emission, as well as range per charge for electric cars) can be substantiated with credible, current and scientific data, preferably based on real world performance rather than lab testing. Consideration should also be given to how such representations are conveyed, particularly comparative fuel and emission claims as the ACCC is concerned that these are not understood by consumers; and
  • reviewing the terms of agreements between manufacturers and dealers, and whether any obligations in relation to managing complaints or warranty issues may restrict dealers in a way that precludes them complying with the ACL (e.g. excluding any claim for consequential loss; limiting claims; etc).

Written submissions about the draft report can be made to the ACCC by 7 September 2017. The ACCC will also hold a roundtable with invited stakeholders on 25 September 2017. The ACCC’s final report is due in late 2017, although we don’t expect any fundamental change between this and the draft Report.

Our more detailed review of the Report is set out further below.

Consumers face speedbumps enforcing their statutory rights

The ACCC found four key causes leading to difficulties for consumers in enforcing their ACL rights. 

Complaints handling

The ACCC considers new car manufacturers’ complaints handling policies and systems to be a hindrance to consumers’ ability to enforce their consumer guarantee rights. In the ACCC’s view, these systems fail to take such rights into account and raise a number of ACL compliance issues.

According to the ACCC, manufacturers’ complaint handling procedures require dealers to first check whether a car is under a voluntary warranty before any response is given to the consumer, meaning that that interactions can only take place within the manufacturers’ warranty framework, to the exclusions of consumers’ statutory entitlements.

In particular, the ACCC’s view is that consumers are being denied a remedy from manufacturers or dealers once any new car warranty expires, even though the consumer may be entitled to a statutory remedy. To illustrate the point, the ACCC provided the example that where a consumer’s issue with their new vehicle was covered by a manufacturer’s warranty, then that manufacturer was likely to purport to repair the vehicle on a ‘discretionary’ or ‘goodwill’ basis – these “discretionary” repairs could fall short of what the consumer is actually entitled to under the ACL.

Dominant culture of repair

The ACCC also found there was a ‘dominant culture of repair’ underpinning manufacturers’ systems and policies. That is, manufacturers and dealers displayed a strong preference to repair vehicles and defects rather than providing a refund or replacement (allegedly even where it was known there was were systemic mechanical issues with cars).

Lack of information

The Report highlighted concerns around whether consumers were being sufficiently informed about their legal rights at the point of sale. The confusion arising from the crossover between consumer statutory rights under the ACL consumer guarantees regime and any rights that a consumer may have under voluntary manufacturers’ warranties and extended warranty products was canvased, with the Report finding this to be exacerbated by dealers being incentivised (by commission based remuneration) to sell add-on consumer products like extended warranties. 

Similarly, the ACCC considers that the prevalent use of NDAs by car manufacturers when resolving complaints means that the message to consumers is that they will not be entitled to their statutory rights or rights under other warranties unless they sign these agreements, when this is not the requirement under the law. 

The ACCC contemplates that the prevalence of NDAs have the effect of suppressing the incentives for manufacturers to compete with each other on vehicle quality and post-sales services, as there would be less information in the marketplace about new car issues, like safety issues or other defects.

Commercial arrangements between manufacturers and dealers

The Report also highlights the tension that exists between the manufacturer and dealer in ACL compliance:

  • dealers are often the first point of contact for consumers experiencing issues with their new cars and have more direct responsibility than manufacturers to provide ACL remedies;
  • but as franchisees of the manufacturers, dealers are put in the position of trying to balance their obligations to consumers under the ACL with protecting their own financial interests and relationship with the manufacturer.

The Report observes the often stringent requirements in manufacturer-dealer franchise arrangements, for example:

  • that the manufacturer must establish a remedy was warranted before any reimbursement to the dealer can be made for vehicle repairs or servicing; and/or
  • predetermined maximum amounts that dealers are allowed to provide to consumers in the form of warranty repairs (without the manufacturers prior approval).

According to the ACCC, requirements like these have the likely impact of reducing the ability of consumers to receive a remedy, and a timely one at that, because dealers may believe that if they do not comply, their franchise agreement will be put at risk or they may otherwise incur loss.

The ACCC considers that the proposed ACL amendments coming out of this year’s ACL Review will provide consumers with additional clarity about when they are entitled to a refund or replacement. However, the ACCC also provides a warning that it will also be looking to use enforcement action where appropriate, such as the proceedings instituted against Ford.

Emissions that don’t pass the sniff test

The Report found that fuel consumption and environmental impact are important factors considered by consumers in their new car purchasing decision. The ACCC is concerned data about that fuel consumption and emissions performance that is provided to consumers may be misleading.

The ACCC engaged a number of external consultants, including the Australian Automobile Association and consulting engineers (ABMARC), to conduct certain tests related to vehicle performance. Their research indicated that real-world fuel consumption is on average 25 per cent higher than official laboratory test results, with the size of this gap being differing between across car types or brands, but generally increasing in recent years. For this reason the ACCC casts doubt on the comparative value of fuel consumption figures displayed on fuel consumption labelling.

The Report also highlights the impact to consumers when manufacturers fail to appropriately qualify their fuel consumption claims. The ACCC considers that the use of absolute values on fuel consumption and emissions labelling contributes to consumer misunderstanding, even though these labels are designed to help consumers compare different cars.

The ACCC flagged its support for moves to enhance the quality of information supplied to consumers, including the introduction of more realistic laboratory and real driving emissions testing. The ACCC also supports changes to the fuel consumption labels affixed to new cars to improve their comparative use (e.g. the introduction of star-based or annual operating cost information).

Independent repairers stuck in jam

Characteristics

The Report considered what the ACCC calls ‘aftermarkets’ (which includes repairs, servicing and replacement parts). It found that, in addition to the sale of new cars, manufacturers and dealers earn significant profits from aftermarket sales. In fact the Report claims that it is generally recognised that manufacturers and dealers earn higher profit margins from the sale of replacement parts for, and from the repair and service of new cars, than from selling the new cars themselves.

According to the Report, the relationship between the sale of new cars and aftermarket sales means that manufacturers compete in selling new cars to earn significant proportions of their profits down the road meaning that there is a real drive (pun intended) by manufacturers to ‘lock in’ these consumers to their own supply chains. 

The Report found that independent repairers compete in the aftermarket and are dependent on manufacturers and dealers for information, data, tools and parts required for repairs and servicing of new cars.

Issues with gaining access to technical information and data

The Report expressed concern with the effect of limited access to information and data (that is necessary to repair and service new vehicles) on independent repairers and how that also effects competition in the ‘aftermarket’.

Whilst the ACCC acknowledged that some car manufacturers have voluntarily committed to providing independent repairers with the same information used by themselves and their dealers, problems with the breadth, depth and timeliness of the information appear to be enduring. In fact, the Report found that few manufacturers provide equivalent access to the information, and many provide very little or no information at all.

The Report found that existing methods of information sharing (eg Heads of Agreement between industry associations and codes of practice) had many shortcomings, including their non-binding nature, the possibility of wide interpretation, lack of dispute resolution mechanisms and the ability of enforcement against signatories (like penalties for non-compliance).

Although independent repairers can access information from sources other than the car manufacturing industry in Australia (like third party websites and from overseas jurisdictions), such alternatives provide information that is commonly incomplete, offers no continuity of supply or relates to non-Australian vehicle models only.

The Report recognises that other jurisdictions such as the US and EU, have regulations which make technical information available to independent repairers. The ACCC has foreshadowed regulatory intervention as the way forward and considers that a mandatory information sharing scheme should be introduced for car manufacturers to share the information in real time with independent repairers on a commercially fair and reasonable basis.

Parts restrictions and pricing

While the Report accepts that in some circumstances manufacturers have legitimate reasons for restricting access by independent repairers to certain OEM parts (like parts relating to vehicle security), it does contemplate whether other motives are at play—for instance, steering more repair and service work back to ‘authorised’ dealers and preferred repairers.

The ACCC discovered that a lack of transparency and consistency across what parts will be subject to restrictions leads to increased uncertainty and costs to independent repairers.

In a similar vein, the ACCC received anecdotal evidence suggesting that the prices of parts in Australia were rising relative to the costs of new vehicles (and are also rising in comparison to prices in other jurisdictions). The ACCC is concerned that high prices of parts may cause detriment by creating distortions in decision-making. For example, high prices of replacement parts might cause cars to be ‘written off’ as opposed to repaired even when the latter is more efficient.

However, the countervailing view is that prices of parts should be considered in the broader context of new car purchases. That is, manufacturers often heavily discount new cars to the benefit of consumers in order to capture higher margins from parts sales. But the ACCC says it does not have any evidence of this at play.

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