Extended warranty cover plans in breach of s.19 FSMA
The FSA's recent action in Re Digital Satellite Warranty Cover Ltd to wind up companies with 'public interest' petitions for carrying on insurance business without FSA authorisation, in breach of the general prohibition in s.19 FSMA, demonstrates its willingness to take robust action to tackle those who attack the perimeter by engaging in regulated activities without authorisation.
The case also provides useful guidance on the definition of an 'insurance contract'. Mr Justice Warren considered the definition of a 'contract of general insurance' within Part I of Schedule 1 of the Regulated Activities Order (RAO) but found it frustratingly circular. He therefore turned to the common law and the starting point in considering the meaning of a contract of insurance which is the decision of Channell J in Prudential Insurance Co v Inland Revenue Commissioners [1904] 2 KB 658 who said:
"A contract of insurance, then, must be a contract for the payment of a sum of money, or for some corresponding benefit such as the rebuilding of a house or the repairing of a ship, to become due on the happening of an event, which event must have some amount of uncertainty about it, and must be of a character more or less adverse to the interest of the person effecting the insurance".
Rejecting the suggestion that agreeing to repair or replace a satellite TV box does not amount to insurance, the Judge held that "a contract which provides cover for risk in the shape of a consideration other than money, and in particular an obligation to repair or replace, is, at common law, capable of being an insurance contract". He found support also from a European Court of Justice ruling that "the concept of a contract of insurance therefore appears to include a contract where the cover provided is not cash but services".
Mr Justice Warren concluded that the companies were guilty of breaching the general prohibition and should be wound up in the public interest. The Judge was not persuaded that the 'principle against doubtful penalisation' should apply when it comes to consumer protection. Whilst a firm might feel aggrieved to be found guilty of a s.19 breach and wound up simply because of a misinterpretation of detailed law and regulation, it should be able to avail itself of the statutory defence in s.23(3) FSMA if it took all reasonable precautions and exercised due diligence to avoid committing the offence. The case also seems to confirm that, although breach of the general prohibition is a criminal offence, the FSA's usual recourse is not to the criminal courts but to injunctions or winding up, and then only after warnings to the firm.
The case is helpful for those who wish to promote such products but who are unclear whether they require FSA authorisation. It also serves as vindication for commentators - mainly insurers resentful of their un-regulated competitors - that such warranties are, indeed, regulated products.