This article was originally written for and featured in Insurance Day.
In an unanimous judgment delivered on 13 February 2013 by Lord Sumption, the Supreme Court has ruled that the selling of contracts of insurance providing benefits in kind are “regulated activities” which must only be carried out by persons who are authorised by the FSA or exempt from authorisation.
The issue was considered in the case of Digital Satellite Warranty Cover Limited and another v Financial Services Authority  UKSC 7. The appellants, Digital Satellite Warranty (“DSW”) and Satellite Services, had sold and performed extended warranty contracts, repairing or replacing satellite television equipment in return for periodic payments of between £6.49 and £11.49 per month. Between them, DSW and Satellite Services made a profit of over £12 million.
DSW and Satellite Services had solicited customers of Sky, whose details they had obtained from a database misappropriated from Sky, by cold-calling those customers and/or bombarding them with mail-shots. They also passed themselves off as being connected to Sky, despite having no connection to Sky whatsoever. Following complaints from customers, the firms were investigated by the Financial Services Authority (“FSA”). As a result of those investigations, the FSA presented public interest petitions seeking the winding-up of DSW and Satellite Services on the basis that they had been carrying out and effecting insurance business in breach of the general prohibition in section 19 of the Financial Services and Markets Act 2000 (“FSMA”) that no person may carry out a regulated activity without authorisation or exemption.
The legal issues considered by the High Court and Court of Appeal were whether the contracts entered into by DSW and Satellite Services were contracts of insurance at all and, if so, whether they fell within the meaning of Article 3(1) of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 SI 200/344 (the “RAO”) because, if they did, the businesses had to be authorised, and by being unauthorised would therefore be in breach of section 19 of FSMA. Both the High Court and the Court of Appeal found for the FSA and ordered that DSW and Satellite Services be wound up.
DSW and Satellite Services then appealed against the winding-up orders to the Supreme Court, and lost. Both firms are now in liquidation. The majority of Lord Sumption’s judgment contains a technical analysis of the incorporation of EU law into domestic English law. However, the key points are that:
- A contract of insurance is not limited to an obligation to pay money upon a specified contingency, but can include the provision of a service such as the repair or replacement of an insured’s property.
- A contract for repair or replacement only, which does not oblige an insurer to indemnify the insured for costs incurred by the insured, falls within paragraph 16 of schedule 1 to the RAO. Accordingly, selling such contracts is a regulated activity.
- The European directive stating what kinds of businesses are to be regulated by domestic legislation, and which prescribes specific types of businesses which have to be regulated, does not preclude a member state from regulating other types of businesses which the directive might not cover.
The implications for the insurance industry of this case are two-fold. First, the well regulated and authorised companies offering this type of cover to consumers should welcome the fact that the FSA are clamping down on disreputable unauthorised companies. Second, unauthorised, but otherwise bona fide providers of such insurance should take immediate steps to obtain authorisation.
On the first point, the FSA’s stance with regard to unauthorised firms is hardening significantly. The FSA now has a real appetite to go after unauthorised firms which target consumers. Tracey McDermott, the director of enforcement and financial crime at the FSA, commented on the Digital Satellite Warranty Cover Limited case: “This is an important judgment. This is the first time the FSA has appeared in front of the Supreme Court in a case involving unauthorised business and we are pleased that it has agreed with our approach, and with the decisions of the High Court and Court of Appeal. The judgment will help protect consumers from inadvertently dealing with unauthorised businesses that offer similar cover. The Supreme Court’s decision will be of interest to other firms that offer warranties, helping them understand when they should speak to us about getting authorised.”
In addition to the presentation of winding-up petitions in the public interest, section 19 of FSMA provides that carrying out an unauthorised activity without an exemption or authorisation is a criminal offence. The penalty, if found guilty, is a maximum term of two years’ imprisonment and/or an unlimited fine.
However, turning to the second implication, these types of insurance products can be complicated and there may be confusion as to whether a particular product falls within the ambit of the RAO or not. The very fact that this case went all the way to the Supreme Court demonstrates that the defining of products is a complicated issue.
An unauthorised firm which is unclear about whether authorisation is required would be well advised to approach the FSA or seek further advice. There may indeed be circumstances which mean that the firm might be able to rely on a particular exclusion: there are provisions within FSMA that turn activities which would otherwise be regulated activities into unregulated activities.
In summary, the decision of the Supreme Court and the FSA’s attitude towards this case is to be welcomed. Warranty and protection policies account for a significant percentage of products sold to general consumers. When products are sold by reputable firms who take into account factors such as the suitability of the product for the client, they can be of great benefit to the consumer. However, where consumers are mis-sold products by unscrupulous and unauthorised firms, the reputation of the industry as a whole suffers in addition to the detriment caused to the ultimate consumers themselves. Accordingly, it is in the industry’s interests to ensure that it is an orderly and well-regulated market.