In February 2013 the Supreme Court handed down its judgment in Digital Satellite Warranty Cover Limited & another v FSA20. The court upheld the FSA’s view that extended warranties for satellite TV equipment are contracts of insurance for regulatory purposes, notwithstanding that there are no financial payments made to the customer.
Digital Satellite Warranty Cover Limited and Satellite Services both provided, for a monthly fee, extended warranty contracts to owners of satellite dishes, digital boxes and related items. Under the terms of the contracts the firms would replace or repair the customers’ equipment. Significantly, they were not liable to pay any money to customers but instead had to provide the necessary labour and parts to rectify the problem.
The FSA successfully petitioned the High Court, in 2011, for the winding up of these and other firms. This was on the basis that they were effecting and carrying on contracts of insurance, in contravention of s.19 of the Financial Services and Markets Act 2000. That section contains the “general prohibition” against performing regulated activities without being FSA-authorised. The two firms contended that a contract providing benefits-inkind, rather than a payment for loss, could not constitute a contract under the Regulated Activities Order 2001 (which defines contracts of insurance for the purposes of s.19), but the High Court rejected this.
The two firms then appealed to the Court of Appeal and the Supreme Court, arguing that the EU First Council Non-Life Insurance Directive is restricted to contracts which pay out financial sums. They argued, therefore, that the UK’s Regulated Activities Order, which is the UK’s implementation of the Directive, is similarly restricted.
The Court of Appeal and Supreme Court both held that the Directive only laid down a minimum standard for contracts to be classified as contracts of insurance. The two courts did not determine whether the Directive’s classification did in fact include contracts where benefits are paid in kind, preferring to take the approach that the UK was in any event free to adopt a wider classification. The courts found that the Regulated Activities Order continued the UK legislative tradition of including both contracts that paid benefits-in-kind as well as those that paid financial sums. Accordingly the firms had been performing the regulated activity of effecting and carrying on contracts of insurance without the necessary authorisation.
The decision is primarily of interest because, although the firms in the Supreme Court did not argue that the contracts were not contracts of insurance (but instead argued that they fell outside the Regulated Activities Order because of the non-financial nature of the cover), it is nonetheless a Supreme Court decision concerning the legal and regulatory nature of extended warranties. The FSA in its subsequent press release also stated that it was the first time the FSA had been before the Supreme Court over any unauthorised business.
Full regulation as an insurer would be unattractive to many suppliers of extended warranties. The practical solution for providers will most likely remain becoming an Appointed Representative of an existing insurer (in exchange for a fee dependent on the amount of business done).
A cross-border reminder
The decision also throws up an unexpected side point on cross-border activities, notwithstanding that the facts were wholly within the UK. In the case the Supreme Court confirmed that the classification of contracts of insurance in the Regulated Activities Order is not restricted to those set out in the Directive. This becomes an issue when applying the EEA passporting rules which allow an insurer to operate in another Member State. As Lord Sumption at paragraph 14 of the judgment states:
“...What this means is that if the insurer is authorised in, say, the United Kingdom to carry on a category of business which is not included in the eighteen classes in the Annex [to the Directive]... he will not by virtue of his UK authorisation be entitled to carry on that particular category of business in another member state.”
So, the warranty providers in this case may have faced the prospect of full authorisation without necessarily all the cross-border benefits.