Re Digital Satellite Warranty Cover Ltd & Ors

The Financial Services Authority petitioned for public-interest winding-up orders against two companies and a partnership on the basis that each had effected and carried out extended warranty contracts without the authorisation required by section 19 of the Financial Services and Markets Act 2000 (FSMA). The court held that the contracts were contracts of insurance at common law and for the purposes of FSMA/RAO because an obligation to repair or replace equipment constitutes "money's worth" and thus may be insurance cover. The court construed the Regulated Activities Order (RAO) Schedule 1, concluding that the warranty-style contracts fell within paragraph 16 ("Miscellaneous financial loss") and, in many cases, within classes equivalent to property-damage cover (classes 8 or 9), so authorisation was required. Given the consistent unlicensed carrying-on of insurance business, the judge found it in the public interest to make winding-up orders against each respondent.

Background and parties. The Financial Services Authority (FSA) brought three public-interest petitions seeking winding-up orders against Digital Satellite Warranty Cover Ltd (DSWC), Nationwide Digital Satellite Warranty Services Ltd (NDSWS) and a partnership trading as Satellite Services (the Partnership), alleging they had carried on substantially the same business of selling extended warranty cover for Sky satellite equipment without FSMA authorisation.

Relief sought. The FSA sought winding-up orders on the public-interest ground because the respondents were said to be effecting and carrying out contracts of insurance in breach of the general prohibition in section 19 FSMA.

Facts and evidence. The respondents marketed "fully comprehensive" warranty plans by mail-shots, telephone scripts and certificates. Standard terms obliged the provider to repair or replace equipment (dish, set-top box, cabling, remote) and, particularly for DSWC and the Partnership, did not exclude accidental damage or storm damage. NDSWS documentation was similar though its written exclusions were wider. The bundle included mail-shots, scripts, certificates, some telephone transcripts and terms; NDSWS did not appear and filed no rebuttal evidence. DSWC had de-registered for VAT and registered for Insurance Premium Tax during 2010.

Issues framed. The court framed: (i) whether the contracts were contracts of insurance at common law and under European law; (ii) whether those contracts fell within Schedule 1 RAO (and thus were regulated activities) and, if so, which class(es) (notably paragraph 16 and classes 8/9/18); (iii) whether the consistent breach of section 19 justified winding-up orders in the public interest; and (iv) what test should be used to classify mixed or composite contracts (FSA's "identifiable and distinct obligation" test in PERG v a "principal object" test).

Reasoning and holdings on legal issues. The judge analysed authorities (Prudential, St Christopher, Medical Defence Union, Card Protection Plan/CJEU) and concluded a contract need not promise payment of money to be an insurance contract; an obligation to provide repair or replacement is "money's worth" and may be insurance. Under RAO, contracts of this kind were properly classified under paragraph 16 (miscellaneous financial loss), and where additional cover (for accidental or storm damage) was provided they could also fall within property-damage classes (8 or 9). The judge rejected a strictly restrictive penal construction of RAO and applied ordinary construction in light of consumer-protection and Directive objectives. On classification tests, the court accepted that discrete insurance elements should be identified and authorised for each relevant class; where additional cover was not merely ancillary, authorisation was required.

Disposition. The court concluded that the respondents had effected and carried out contracts of insurance without authorisation and that their businesses had been conducted in consistent breach of section 19 FSMA. Winding-up orders were made against DSWC, NDSWS and the Partnership for reasons of public protection, taking account of the factual conduct and the absence of authorisation.

At first instance the court granted the FSA's petitions and made winding-up orders in respect of Digital Satellite Warranty Cover Ltd, Nationwide Digital Satellite Warranty Services Ltd and the Partnership. The judge held that the respondents had effected and carried out contracts of insurance without authorisation in breach of section 19 FSMA: repair-or-replace obligations constitute "money's worth" and the contracts fell within Schedule 1 RAO (notably paragraph 16 and, in many cases, classes 8/9), so the consistent unauthorised conduct justified winding-up in the public interest.