In the matter of Digital Satellite Warranty Cover Limited and another v Financial Services Authority

The Financial Services Authority sought winding-up orders in the public interest under section 367(1)(c) of the Financial Services and Markets Act 2000 on the ground that the appellants had carried on regulated activity contrary to the general prohibition in section 19. The appellants sold extended warranty contracts providing repair or replacement services (benefits in kind) rather than monetary indemnities.

The court held that United Kingdom legislation implementing the EC Non-life Insurance Directives did not prevent the United Kingdom from regulating classes of direct non-life insurance more widely than the Directive's Annex. Even if the Directive were confined to contracts providing pecuniary benefits, the Regulated Activities Order (in particular Schedule 1, Part I, Class 16: "Miscellaneous financial loss") is properly read as covering the appellants' contracts providing benefits in kind.

Accordingly the appellants were carrying on regulated activities without authorisation and the winding-up orders were justified. The court declined to decide definitively whether the Directive itself excludes benefits in kind, noting that such a question might ultimately require a reference to the Court of Justice.

Background and parties: The first appellant was Digital Satellite Warranty Cover Ltd and the second was Bernard Freeman and Michael Anthony John Sullivan trading as "Satellite Services". Both sold extended warranty agreements for satellite equipment, promising repair or replacement on breakdown in return for periodic payments. The Financial Services Authority applied for winding-up orders in the public interest under section 367(1)(c) FSMA 2000 on the ground that each appellant was carrying on a regulated activity contrary to section 19.

Procedural history: Warren J at first instance ordered the appellants to be wound up ([2011] Bus LR 981). Their appeal was dismissed by the Court of Appeal ([2012] Bus LR 990 / on appeal from [2011] EWCA Civ 1413). The appellants appealed to the Supreme Court ([2013] UKSC 7).

Nature of the application: The relief sought by the respondent was public-interest winding-up under section 367(1)(c) FSMA 2000 because the appellants allegedly carried on regulated insurance business without authorisation.

Issues framed: (i) Whether the EC First Non-life Insurance Directive and its Annex precluded Member States from regulating insurance contracts providing benefits in kind under national provisions implementing the Directive; (ii) whether the Regulated Activities Order (Schedule 1, Part I, in particular Class 16 "Miscellaneous financial loss") covered the appellants' extended warranty contracts; and (iii) whether, on the facts, the appellants were carrying on regulated activity without authorisation.

Court's reasoning and conclusions: The court explained the limited objective of the First Non-life Directive: to prescribe certain classes of business that Member States must regulate and to harmonise solvency and authorisation principles for those classes, not to prevent Member States from regulating other categories of insurance business. The Directive therefore did not bar the United Kingdom from transposing and applying wider categories in its national legislation. Even on the assumption (adopted for argument) that the Directive excluded contracts providing benefits in kind, the Regulated Activities Order derived Class 16 from earlier domestic statutory definitions of "pecuniary loss insurance business" and must be construed as covering the appellants' contracts. The court agreed with Warren J that contracts requiring repair or replacement in kind fall within Class 16(b) (or failing that, 16(c)) because the insured risk is the same and the contract protects against financial loss by providing what the insured would otherwise have to pay for. The appeal was therefore dismissed. The court noted that a final resolution of whether the Directive itself excludes benefits in kind could require a reference to the Court of Justice but declined to make such a reference in this case.

Appeal dismissed. The court held that the First Non-life Directive did not preclude the United Kingdom from regulating classes of insurance more broadly than the Directive's Annex and that the Regulated Activities Order (Schedule 1, Part I, Class 16) covers the appellants' extended warranty contracts providing benefits in kind; accordingly the appellants carried on regulated activity without authorisation and winding-up orders were justified.

First instance: Warren J ordered winding up ([2011] Bus LR 981). Appeal to the Court of Appeal dismissed ([2012] Bus LR 990; on appeal from [2011] EWCA Civ 1413). Further appeal to the Supreme Court ([2013] UKSC 7) where the appeal was dismissed.