Advocacy and the regulator

Speakers: 
Mr Rod Sims, Chairman
Conference: 
Australian Automotive Dealer Association
18 September 2017

Chairman Rod Sims discusses the ACCC's New Car Retailing Industry Market Study investigating the competitiveness of the Australian retail car industry.

Transcript: 

Check against delivery

Good morning ladies and gentlemen, and thank you for the opportunity to speak to you today.

Cars have become a focus of the ACCC in the past year as never before.

We’ve always had an interest in petrol but recently the Takata airbag recall, Ford transmission, VW and Audi emissions, and Holden consumer guarantees have occupied a lot of the ACCC’s time. As has the New Car Retailing Industry Market Study.

The market study will be the main focus of my speech today, but I would also like to take this opportunity to update you on Takata airbags which I’m sure will be of interest to you all.

The ACCC is conducting an urgent safety investigation into the recalls, following the tragic death of a man in Sydney in July from a defective Takata airbag.

Takata airbag recalls affect a large number of car makes and models in Australia, and a small number of motorcycles and trucks. The inflator components in certain Takata airbags may deteriorate and subsequently misdeploy in an incident causing metal fragments to propel out of the airbag.

The injuries incurred from Takata airbags are horrific and 19 people have died worldwide. I am urging all Australian vehicle owners to check whether their airbag is affected on www.productsafety.gov.au, or by contacting their dealership or the vehicle manufacturer and ask them to check your vehicle’s VIN.

In particular, it is critical that drivers with alpha airbags installed take immediate steps to have the airbags replaced because of a significant risk of injury or death involved in using vehicles with these airbags. Drivers with other recalled airbags should arrange for them to be replaced as soon as possible.

This is the largest recall involving vehicles in world history, and 1.5 million vehicles in Australia have not had their Takata airbags replaced. The voluntary recalls involve 12 different manufacturers and various models. There are currently 75 individual recalls in place.

You as auto dealers, most with service departments, are essential to the success of the recall and preventing further deaths in Australia.

This won’t be easy. I thank you in advance.

Returning to the draft New Car Retailing Industry Market Study, there is no way to sugar coat why new cars became a focus.

Over the past two years, consumer complaints about new cars have been growing louder.

For example, manufacturers of new cars appeared in our top 10 most complained about traders in 23 of the past 24 months. Further, over the last two years, the ACCC has observed an upward trend in the number of consumers contacting the ACCC in relation to cars, receiving over 10 000 contacts in total.

After 12 months of investigation, consultation and research, we have gained a better understanding of the industry, including about the nature of the relationship between manufacturers and dealers and how this may affect practices at the point of sale.

Today I would like to highlight the three key observations from our draft report:

  1. Car manufacturers’ complaints handling systems and policies are often preventing consumers from obtaining the remedies to which they are entitled under Australian Consumer Law.
  2. A mandatory scheme should be introduced for car manufacturers to share technical information with independent repairers.
  3. Buyers of new cars need more accurate information about new cars’ fuel consumption and emissions.

However, let me start by saying that the ACCC acknowledges that dealers may find it challenging to simultaneously meet their ACL and other obligations, and maintain their long-term commercial relationship with the manufacturer.

You are in an invidious position.

The ACCC also understands that dealers operate in a very competitive market; few industries have greater choice of product at the point of sale.

This means you typically experience slim margins on the sale of new cars, and most money is made from aftermarket sales, including finance and insurance products, service and repairs and replacement parts.

We recognise that the prescriptive nature of most agreements between manufacturers and dealers is a particular constraint on dealers’ commercial power.

These issues are described in the draft new car retailing industry market study the ACCC released in August.

In particular, our draft report breaks down some of the key features of these arrangements and through our investigations, we are aware of the prescriptive nature of some dealer agreements.

We are aware that some dealer agreements can specify everything from car showrooms and service facilities, to car sales, servicing and customer satisfaction targets. Each expectation can impose a further cost on you and potentially reduce your margins.

And all of this occurs before your customer has signed on the bottom line.

We have recently received submissions in response to our draft report which have called for the ACCC to further investigate the imbalance in the commercial relationship between manufacturers and dealers.

Some submissions, have highlighted that manufacturers’ dealership agreements and policies can affect the responses provided to consumers seeking a remedy and discourage dealers from raising claims with manufacturers. The ACCC is having greater regard to these issues and will be further engaging with the AADA, MTAA and other dealers in the coming months on these and other issues.

1. Consumer guarantees and the role of dealers

Should a consumer experience a problem with their new car, their first point of contact is generally you the dealer.

According to CHOICE, a majority of consumers do not escalate their complaint beyond the dealer, which makes it important for dealers to resolve complaints satisfactorily.[1]

That means it’s even more important to ensure that dealers are aware that consumer complaints need to be resolved in accordance with Australian Consumer Law.

It is essential that dealers understand that manufacturers’ warranties and extended warranties do not displace the consumer guarantees or statutory rights available to consumers under state and territory legislation.

Even if a consumer is not entitled to a remedy under the terms of a warranty provided by the manufacturer, dealer or a third party, they may be entitled to a statutory remedy under Australian Consumer Law, or state or territory legislation.

As retailers, dealers have more direct responsibility than manufacturers to provide remedies under Australian Consumer Law to a consumer. However, equally a dealer is entitled under the Australian Consumer Law to then seek reimbursement for those remedies from the manufacturer where the manufacturer is responsible for the failure.

The ACCC understands that dealers respond to consumer guarantee or warranty claims within the framework of the policies and procedures set by the manufacturer.

We further understand that a range of factors contained within the dealer agreement may constrain the ability of dealers to provide a remedy to a consumer.

First, dealers may need prior approval from the manufacturer before providing a remedy.[2]

For example, there may be stringent requirements by the manufacturer to establish the remedy was warranted before it approves reimbursement.

Second, there may also be predetermined maximum amounts that dealers are permitted to spend on warranty repairs without further approval by manufacturers.[3]

Dealers may also believe that if they do not comply with these requirements, their franchise or dealer agreement will be put at risk or they may incur losses.   

We also understand that some submissions to our study noted that dealers may not be adequately reimbursed by the manufacturer for remedies they provide to consumers in circumstances where the manufacturer is liable for the defect.

Consequently, the dealer may be reluctant to offer remedies without certainty of being indemnified, which may reduce consumers’ access to appropriate or timely remedies.[4]

Notwithstanding these challenges, it remains the responsibility of dealers to meet their legal obligations to consumers under the Australian Consumer Law, and for manufacturers in turn to meet theirs and not to adopt commercial arrangements that stifle this.

In particular, consumers are entitled to claim a remedy directly from dealers if the products do not meet one or more of the relevant consumer guarantees.

Let me be clear: dealers cannot circumvent their obligations by referring consumers to the manufacturer.

But remember this: the manufacturer also has obligations, and most of our enforcement focus will be on the manufacturers.

Where you believe that dealer agreement provisions, policies or procedures may breach the Franchising Code of Conduct, or the Competition and Consumer Act more generally, you can always report this to the ACCC for consideration.  

In targeting non-compliance with consumer guarantees, the ACCC’s main focus is on manufacturers’ complaints handling systems, policies and practices. The ACCC has recently taken action against Ford, alleging that it engaged in unconscionable conduct and misleading conduct in its response to customer complaints.

The draft report also referred to reasons why consumers may misunderstand or be confused about the distinction between consumer guarantees, manufacturers’ warranties and dealers’ extended warranties, particularly:

  • Focus on warranty protections at the time of purchase, and
  • Limited information about consumer guarantees at the time of purchase.

To help dealers ensure they do not misrepresent statutory consumer guarantees, the ACCC’s draft report notes that the ACCC will:

  • Work with industry participants, particularly dealers, to develop a concise and simple explanation of consumer guarantees and their interaction with warranties, which should, as industry best practice, be provided to consumers at the point of sale of a new car, and
  • Assist consumers and business, including dealers, to better understand their rights and obligations under the ACL when it comes to new car defects and failure. The ACCC will work with other ACL regulators to publish an updated version of Motor vehicle sales & repairs – an industry guide to the Australian Consumer Law, to ensure that this publication addresses the issues identified in this study.

Further clarity around the meaning of ‘major failure’ under the Australian Consumer Law

We’ve also heard from dealers, along with a number of other stakeholders, about the difficulty of interpreting how consumer guarantees operate.

For example, we’ve heard industry complaints that it can be unclear at what point a defect within a new car may constitute a ‘major failure’ which would thereby entitle a consumer to a refund or replacement under the Australian Consumer Law.

On 31 August 2017, this concern was addressed by Commonwealth, State, Territory and New Zealand Ministers for fair trading and consumer protection; at the Legislative and Governance Forum on Consumer Affairs (CAF). At this meeting, all relevant Ministers endorsed the proposals put forward by Consumer Affairs Australia and New Zealand (CAANZ) in the Australian Consumer Law Review Final Report.

The ACL Review, which the ACCC endorsed in its draft report for the market study, makes two proposals to address uncertainties in the application of the law regarding ‘major failure’.

These proposals are intended to enhance and provide greater clarity to existing ACL rights, not replace them.

Proposal 1

The ACL Review proposes that the ACL be amended to specify that where a good fails to meet the consumer guarantees within a short specified period of time, a consumer is entitled to the remedies of a refund or replacement without needing to prove a ‘major failure’.

Proposal 1 would create a time-limited right for a consumer to choose a refund or replacement or opt for a repair without the need to demonstrate a major failure.

This reform is aimed at providing increased certainty for consumers in asserting their rights to a refund, replacement or repair and to avoid cycles of failed repairs.

Proposal 2

It also proposes that the ACL be amended to clarify that multiple non-major failures can amount to a major failure.

Proposal 2 is intended to clarify that a consumer may establish a major failure where, for example, there are multiple issues with a new car that would be sufficient to deter a reasonable consumer from buying it.

 

This is also a particular rule you should consider: being a reasonable consumer, had you known the product – in this case a new car – would experience the problem or problems it did experience, would you have bought it? If the answer is ‘no’, then a refund should be on the table.

The ACCC has recently accepted a court enforceable undertaking from Holden which includes at least two commitments that are consistent with proposals recently endorsed by Australia’s Consumer Affairs Ministers.

Pursuant to the undertaking, Holden will:

  • Enable owners of new Holden vehicles who experience a problem with their car that causes it to become immobile and no longer driveable within 60 days of its purchase, to claim a refund or replacement vehicle without the need to demonstrate a major failure; consistent with Proposal 1 from the ACL Review.
  • Improve and supplement Holden’s existing Consumer Law Compliance Training Program, for dealers and relevant staff, by ensuring that it includes further guidance/clarification about the fact that multiple failures of a vehicle may constitute a major failure entitling the customer to a refund or replacement rather than a vehicle repair; consistent with Proposal 2 from the ACL Review.

The ACCC considers that this commitment from Holden is consistent with best practice ACL compliance.

However, the ACCC will continue to target ACL non-compliance, particularly with manufacturers’ complaints handling systems, policies and procedures as well as any instances of non-compliance by dealers, including through enforcement action where appropriate.

2. Mandatory scheme for car manufacturers to share technical information

Our study has uncovered that there are problems with the detail and timeliness of technical information to service and repair cars available to independent repairers.

This is despite a voluntary commitment made by car manufacturers in 2014 to provide independent repairers with the same information to repair and service new cars that they provide to their authorised dealers.

Manufacturers have the ability to limit competition in the repair and service sector by controlling access to the technical information required to repair and service cars.

Car manufacturers have an incentive to limit this access to steer service work to authorised dealers.

Our view is that manufacturers should be required by a mandatory scheme to share the same technical information with independent repairers that they provide to dealers on commercially fair and reasonable terms.

Independent repairers need access to electronic information and data produced by manufacturers to properly repair and service new cars, and to compete efficiently and effectively in the sector.

A lack of competition in this sector hurts new car buyers who have fewer options to get the best deal for repairs and servicing.

It’s important to note that Australia is not the only jurisdiction to have faced this issue.

In the US and the European Union, mandatory schemes have been introduced to require manufacturers to share technical information with the independent sector.

Other jurisdictions are also looking to follow suit.

3. More accurate information about fuel consumption and emissions performance

Buyers of new cars need more accurate information about new cars’ fuel consumption and emissions.

Running costs, such as fuel consumption, can be important factors in making purchasing decisions for buyers when choosing a new car. The ACCC is concerned that what new car buyers are told their car will achieve is very different from practice.

Fuel consumption and emissions testing procedures currently rely on laboratory testing rather than testing in real-world driving conditions. The study found that manufacturers are not always appropriately qualifying fuel claims in their promotional material to consumers and that many consumers believe that the provided laboratory test figure are what they will achieve in real life.

Further, research based on preliminary results from vehicle testing commissioned by the Australian Automobile Association has indicated that real-world fuel consumption is on average 25 per cent higher than official laboratory test results that are provided on mandatory vehicle labels. Most important, the degree of difference between laboratory and real-world test results varies across car types or brands, with the discrepancy ranging from 1 per cent to 60 per cent. This casts doubt on the comparative value of fuel consumption figures. We note that the final results of this research are due later this year.

Our report notes that representations to consumers about fuel consumption and emissions for their new car need to be accurate and appropriately qualified.

We also support introducing more realistic laboratory tests and an on-road ‘real driving emissions’ test to give people more accurate information before they buy.

Conclusion

Ladies and gentlemen, no one at the ACCC has any illusions about the difficulties you face as new car retailers.

You are the middlemen and women in a highly competitive market.

You are being squeezed by large multinationals which are themselves in a constant battle for survival in an age of great technological change.

I firmly believe that the decision by Holden as regards Australian Consumer Law will become a point of difference in the market, and I hope it becomes industry standard.

This will have significant implications for the industry; but will also provide greater confidence to your customers, although this will present challenges for your suppliers, the manufacturers.

The AADA has been a strong advocate for your industry, as you would expect, and we look forward to continue working with the AADA as we move towards concluding our market study into the new car retailing industry.

Thank you.

 

[1]CHOICE, ‘Turning lemons into lemonade: consumer experiences in the new car market’, 15 March 2016, pp. 9 and 11.

[2] ADS submission, pp. 4-5 and 7. https://www.accc.gov.au/system/files/Automotive%2520Dealer%2520Services.pdf

[3] Car Solutions submission, November 2016, p. 3. https://www.accc.gov.au/about-us/market-studies/new-car-retailing-industry-market-study/submissions-in-response-to-issues-paper

[4] SBDC submission, November 2016, pp. 5-6. https://www.accc.gov.au/system/files/Small%2520Business%2520Development%2520Corporation.pdf

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