Will Supreme Court ruling impact on businesses offering 'repair and replace' warranties?
Author: Stephen Dawson and Natalie Evans
The Financial Services Authority (FSA - now replaced by the FCA) took action against Digital Satellite Warranty Cover Limited (Digital) to wind it up 'in the public interest'.
It was said that the company was carrying on a regulated activity - specifically, that its repair and replace warranties were tantamount to contracts of insurance - without FSA authority.
The FSA said this was in breach of the Financial Services and Markets' Act 2000 (FSMA).
Digital sold and offered extended warranty contracts for periodic payments, under which they contracted to repair or replace satellite television dishes, satellite boxes and other equipment.
The FSA argued that these were contracts of insurance within the meaning of Schedule I, Part I (Regulated Activities) Order 2001 (specifically Class 16 being the most relevant i.e. 'miscellaneous financial loss').
The FSA argued that Digital was not authorised to carry on any kind of insurance business.
Digital said its contracts were not insurance and did not require FSA authorisation to carry on a regulated activity.
The court at first instance rejected their arguments, granting the FSA an order that Digital be wound up.
Digital appealed, but the Supreme Court unanimously dismissed it, stating:
"The Court agrees with the decision of the Courts below that, on the facts, the Appellant's business fell within the risks identified in Class 16. A contract which brings about the result an Insured would otherwise have to pay to achieve (i.e. having functioning equipment) was a contract that protects him from financial loss irrespective of whether the Insurer or the Insured is obliged to pay in the first instance."
The decision is clearly significant for any businesses engaged in the provision of extended warranties to all types of third party consumer goods.
Clause 16 does appear to catch any agreement to provide 'a benefit in kind' when an event occurs; for example, the requirement to repair goods; and where there is a payment of periodic sums for such a warranty.
As a result of this decision, it is entirely probable that businesses offering such warranties with their products have two options:
- spend time and money applying to become authorised to carry out insurance business
- stop offering such warranties
If businesses continue to offer such warranties or other similar forms of protection - for example breakdown cover or 'peace of mind' plans- without FSA authorisation, they risk their business being closed down.
We would also recommend to any business engaging with third party suppliers of extended warranties to ensure they have the appropriate authorisation from the FSA.