Thursday, 7 December 2017

Shake it Up: Major changes ahead for new car industry

The ACCC’s recent New Car Retailing Industry market report is in many respects a watershed moment for the Australian new car industry. The report lays bare many of the questionable practices which have been occurring in the new car industry for many years, including the refusal of many new car retailers to honour consumer guarantees for defective vehicles, inaccurate fuel consumption information being provided to consumers and restrictions on access to technical information for the repair and service of new cars. In this article I will outline the main findings and recommendations of the ACCC’s Report and consider the likely future regulatory landscape which will be facing new car retailers in Australia.

Structure of ACCC Report
The ACCC’s report begins with a summary of the characteristics of the new car retailing industry.  It then identifies four main areas of concern:
  • Consumer guarantees and warranties;
  • Accessing technical information to repair and service new cars;
  • Parts needed to repair and service new cars; and
  • Fuel consumption and emissions.

The ACCC also makes three key findings in its report as follows:
  1. The law offers protections for consumers when purchasing new cars, but there are material deficiencies in the way that consumers are able to enforce their rights, and the way these rights are represented to them by manufacturers and dealers.
  2.  Concerns remain about the effect of limited access to information and data required to repair and service new cars.
  3. Consumers are not receiving accurate information about the fuel consumption or emissions performance of new cars.

New Car Industry
The ACCC summarised the size and characteristics of the Australian new car industry by reference to the following figure:

One of the most notable features of the above diagram is the control which car manufacturers maintain over new car retailing through their ownership of various distributors as well as the process of authorising dealers to sell their vehicles.

The ACCC also estimates the sources of profit for car dealers as follows:

As is clear, new cars comprise the largest share of total revenue for new car dealers, as well as the largest contrinution to gross profits at 38%.  The next largest contributor to the dealer’s gross profits are service fees.

Consumer guarantees and warranties
The ACCC made a number of quite surprising findings about the way in which new car dealers have responded to attempts by consumers to enforce their consumer guarantee rights. The ACCC found that many consumers were having difficulty enforcing consumer guarantees due to a dominant “culture of repair” underpinning manufacturers’ systems and policies for dealing with defects and failures.

Even in situations where the new car has systemic mechanical failures, which constituted a major failure, car manufacturers and dealers would routinely offer a repair rather than a full refund.  From my own experience in advising consumers in relation to disputes with car dealers it is quite apparent that the many dealers hold the incorrect view that consumer guarantees did not apply to a new car purchase.

The ACCC concluded that the primary reason for car dealers and manufacturers failure to honour consumer guarantees were the manufacturers’ complaints handling systems which failed to “adequately take consumer guarantees into account”.

A further problem related to the failure of new car dealers to provide consumers with information about their consumer guarantees at point of sale. As anybody who has bought a new car will know, the whole focus of the new car sale process is directed to the manufacturers’ warranty and the opportunity to upgrade that warranty at an additional cost.

The ACCC also draws attention to the lack of an effective independent dispute resolution option for consumers.  Indeed, the only option for most consumers when faced with repeated refusals from a car dealer to provide a refund for a defective new car is to lodge a claim with a consumer claims tribunal, such as the NSW Civil and Administrative Tribunal (NCAT).

The ACCC identified the following action points which it will be focusing on in order to address the deficiencies which it identified in relation to consumer guarantee rights in the new car industry:

ACCC action 3.1
The ACCC will work with manufacturers and 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.

ACCC action 3.2
To assist consumers better understand their rights when it comes to new car defects and failures, 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 (August 2013) to ensure that this publication addresses the issues identified in this study, including specific guidance on criteria for determining a ‘major failure’. Guidance may also be designed for use by businesses, including dealers, regarding their rights and obligations under the ACL.

ACCC action 3.3
Instances of misleading or deceptive conduct, or misrepresentations, in relation to the use of independent repairers or non-OE spare parts will be targeted through action by the ACCC, including enforcement action where appropriate.

It is clear that consumers need greater education about their consumer rights in relation to new cars.  There is a common perception amongst many consumers that consumer guarantees do not apply to new cars due to the value of purchase in dollar terms. Most consumers see consumer guarantees as being limited to lower value purchases of products, such as appliances and consumer electronics. 

The ACCC made the following recommendation in relation to the consumer guarantee issue:

Draft recommendation 3.1
The ACCC supports the amendments proposed by CAANZ in the recent ACL Review to enhance the ACL and address any uncertainties about the application of consumer guarantees. Of particular relevance to issues arising in this study, the ACCC supports proposals 1, 2 and 3 in the final report on the ACL Review:

Proposal 1: Where a good fails to meet the consumer guarantees within a short specified period of time, a consumer is entitled to a refund or replacement without needing to prove a ‘major failure’.

Proposal 2: Clarify that multiple non-major failures can amount to a major failure.

Proposal 3: Enhance disclosure in relation to extended warranties by requiring:

·       agreements for extended warranties to be clear and in writing
·       additional information in writing about what the ACL offers in comparison to the extended warranties
·       a cooling-off period of ten working days (or an unlimited time if the supplier has not met their disclosure obligations) that must be disclosed and in writing.

As is apparent, the above recommendation, if implemented, will have a profound effect on the new car industry.  The first proposal would effectively create an automatic right to a refund or replacement where the new car fails in a short period of time.

Accessing technical information to repair and service new cars
A key finding of the ACCC in relation to the question of access to technical information for repairs and service was a lack of understanding amongst consumers that they could in fact use an independent mechanic rather than the dealer for their repairs and service needs. A further problem was the inability of many independent mechanics to access the necessary technical information and diagnostic tools required to carry out repair and service work.

The ACCC noted the new car industry association agreement implemented in 2014 which was aimed at creating ‘a fair and reasonable competitive market within the car service and repair industry.’ The agreement, which was entitled the Agreement on Access to Service and Repair Information for Motor Vehicles (Heads of Agreement, was a voluntary scheme by which manufacturers would provide independent repairers with access to technical information on commercially fair and reasonable terms.

Despite the existence of this agreement, the ACCC also found that many independent repairers “remained unable to readily access technical information and diagnostic tools from car manufacturers to repair and service new cars.

In an interested aside the ACCC commented on the increased complexity of modern cars in terms of the lines of computer code required to operate the vehicle. In this respect, the ACCC compared the lines of computer code required to operate a new car with a number of high-tech products, including a F-35 Joint Strike Fighter and a F-22 Raptor Jet. Somewhat surprisingly the ACCC found that the average Ford motor vehicle was well in the lead with 10 million lines of computer code compared to the F-35 which only required 5.7 million lines of code and the F-22 Raptor which only required a paltry 1.7 million lines of code.

A significant finding made by the ACCC was that the voluntary industry agreement has failed to bring about real change in terms of access to technical information. Accordingly, the ACCC concluded that it was now necessary to introduce a mandatory scheme:

Draft recommendation 4.1
A mandatory scheme should be introduced for car manufacturers to share with independent repairers technical information, on commercially fair and reasonable terms. The mandatory scheme should provide independent repairers with access to the same technical information which car manufacturers make available to their authorised dealers and preferred repairer networks.

The mandatory scheme should place an obligation on car manufacturers and other industry participants to achieve the aims and principles set out in the Heads of Agreement (including those in relation to training and reinforcing existing statutory obligations on independent repairers to ensure repairs and servicing are carried out correctly to car manufacturers’ specifications to assure the safety of consumers).

The ACCC then listed the operational matters which would have to be covered by the new mandatory scheme:

Real time access
·           Car manufacturers should make available to independent repairers, in real time, the same digital files and codes, such as software updates and re-initialisation codes, made available to dealers to repair or service new cars.

·           Obligations on sharing technical information should apply to all car manufacturers in Australia.
·           Consideration should be given to including options for relevant intermediaries to access technical information from car manufacturers on commercially fair and reasonable terms.

·           All relevant terms, conditions and exclusions should be defined in the regulation, for instance, defining diagnostic tools and their relevance to facilitating access to technical information, as well as defining security-related information.

Dispute resolution
·           Any dispute resolution processes should be timely and accessible by all relevant stakeholders.
·           Any dispute resolution processes should be subject to compulsory mediation and binding arbitration by an independent external party.

·           Key stakeholders should meet regularly to discuss the rapidly changing nature of repair and service information.

Security-related information and data
·           Similar to the EU or US models, a process for the secure release of security-related technical information should be established or authorised under the mandatory scheme.

·           Appropriate options to enforce the terms of any regulation, if appropriate, should be included (e.g. penalties).

The ACCC’s proposed mandatory scheme will have profound effects for the new car repair and service industry by putting independent repairers on a level playing field with dealer repairers.  

However, for the mandatory scheme to be a success, the ACCC will also have to undertake an extensive education campaign to alert consumers to the fact that they can use independent repairers for their repair and service work without fear of voiding their standard manufacturers’ warranties.

Parts needed to repair and service new cars
In relation to the parts required to repair and service new cars the ACCC found that car manufacturer’s sometimes have legitimate reasons for restricting access, for example where access may compromise security or encourage theft.

However, the ACCC also found that there was a possibility that car manufacturers may be restricting access to parts for the purpose of preventing or hindering competition between authorised repairers and independent repairers. The ACCC also noted a lack of transparency about car manufacturer’s decision about providing access to parts.

The ACCC also found some evidence to suggest that Australian consumers are paying significantly higher prices for parts than consumers in other countries.  For example, the ACCC noted that based on a basket of common crash repair parts it appeared that Australian consumers were paying as much as 3.5 times more than the same parts would cost in the US.

The ACCC’s proposal to remedy this issue was again to create a type of access regime whereby independent repairers would be able to get access to parts on fair and reasonable terms:

Draft recommendation 5.1
OE manufacturer-branded parts and accessories should be generally available to
independent repairers on commercially fair and reasonable terms.

Car manufacturers should develop policies which clearly outline any parts subject to restricted access on security-related grounds. These policies should be publicly available.

The FCAI is well-placed to work with manufacturers to examine whether there is benefit in agreeing a standard definition and detailed classification system for ‘security-related’ parts to provide certainty to parts customers.

Fuel consumption and emissions.
The ACCC’s final significant findings were that:
  1.  manufacturers are not always appropriately qualifying fuel consumption and emissions claims, and
  2.  many consumers believed that advertised fuel consumption and emissions figures were likely to be attained in real-world driving conditions, when this is not the case.
The ACCC highlighted the discrepancies between test results and real-world driving results by reference to testing currently being conducted by the Australian Automobile Association (AAA).

The AAA’s interim report showed the following alarming results based on tests of 17 motor vehicles:
  •  CO exceeded statutory limits in 20 per cent of petrol vehicles tested (two out of ten vehicles) these cars emitted more than three times the laboratory limit for CO;
  •  NOx exceeded statutory limits in 83 per cent of diesel vehicles tested (five out of six vehicles). The highest of these emitted almost nine times the limit for NOx;
  •  particulate matter exceeded statutory limits in one out of six vehicles - this car emitted 40 per cent more CO than the laboratory limit;
  • 16 out of 17 cars tested had fuel consumption levels that exceeded official laboratory results; and
  • fuel consumption was on average 25 per cent higher than the NEDC results.

While the above AAA investigation is not yet complete, the results to date raise many serious concerns about the validity of both fuel consumption and emissions information, as well as basic compliance with statutory limits.  It is apparent that additional regulatory control of both fuel consumption and emissions representations and standards is needed urgently.

The ACCC has made the following two recommendations about this issue.

Draft recommendation 6.1
Changes to the fuel consumption label affixed to new cars should be considered to improve the comparative use of the information supplied. Introducing a star-rating system or annual operating costs may minimise the extent to which consumers interpret an ‘absolute’ fuel consumption/emissions value as equivalent to what they would achieve in real-world driving conditions.

Draft recommendation 6.2
The ACCC supports measures to enhance the quality of information supplied to consumers currently being considered by the Ministerial Forum into Vehicle Emissions, including the replacement of the current fuel consumption and emissions testing regime with the new Worldwide Harmonised Light Vehicles Test Procedure, a more realistic laboratory test, and the introduction of an on-road ‘real driving emissions’ test.

While the ACCC’s approach to this issue is reasonable – namely deferring consideration and resolution of the issues to the Ministerial Forum into Vehicle Emissions – the other key question is which agency will have responsibility for enforcing any new standards.  It is one thing to set a particular standard which car manufacturers must follow, but it is quite a different thing to ensure that these new rules are being monitored and enforced by a competent and well-resourced regulator.

As stated in the introduction, the ACCC’s market study into new car retailing is a watershed moment for the industry.  The new car industry has been much too slow in adapting its business models to new legislative obligations, changing economic conditions and increasing consumer expectations.

It appears highly likely that many of the ACCC’s recommendations will be taken up by government, particularly the recommendation for a mandatory scheme in relation to accessing technical information to repair and service new cars.   This recommendation alone has the potential to significantly impact dealers profit levels, to the extent it facilitates greater competition from independent repairers.  The ACCC’s recommendations in relation to spare parts also threatens to significantly impact car manufacturers profit levels.   

Finally, the new car industry’s ability to defeat or forestall any of the ACCC’s recommendations has been significantly diminished since the announcement of their decision to cease local new car manufacturing.  Gone are the days of the new car industry shakedown when they could gain favourable financial treatment from successive governments on the promise of jobs and growth.  The industry must now brace itself for a rapid and dramatic shake-up which will significantly impact the industry’s bottom line.

No comments: