Digital Satellite Warranty Cover Ltd & Anor v Financial Services Authority [2013] UKSC 7

Two firms sold extended warranty contracts for satellite TV equipment providing repairs or replacements in kind. The Supreme Court held these were regulated insurance contracts within Class 16 of the Regulated Activities Order; EU Non-life Directives set minimum, not maximum, regulation. Appeal dismissed; winding-up orders upheld.

Facts

The Financial Services Authority applied under section 367(1)(c) of the Financial Services and Markets Act 2000 (“FSMA”) to wind up the appellants in the public interest on the ground that each was carrying on, or had carried on, a regulated activity in contravention of the general prohibition in section 19 FSMA (no person may carry on a regulated activity unless authorised or exempt).

The appellants were Digital Satellite Warranty Cover Ltd and Bernard Freeman and Michael Anthony John Sullivan trading as “Satellite Services”. Their business consisted of selling and performing extended warranty contracts under which, for a periodic payment, they agreed to repair or if necessary replace satellite television dishes, digital boxes and associated equipment on breakdown, malfunction or, in some cases, physical damage.

Two features were critical. First, the courts below proceeded on the footing that the contracts were contracts of insurance at common law; although the appellants did not accept this, it was not challenged on appeal. Secondly, the appellants undertook only to provide benefits in kind — repair services or replacement goods — with no contractual obligation to pay money. Neither appellant was authorised, and no exemption arose.

Regulated activities include general insurance business as defined by article 10 of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544), namely effecting or carrying out contracts within the eighteen classes listed in Schedule 1, Part I. The class most directly in issue was Class 16 (“Miscellaneous Financial Loss”). Warren J ([2011] Bus LR 981) held the contracts fell within Class 16(b), alternatively 16(c), and ordered winding up. The Court of Appeal ([2012] Bus LR 990) dismissed the appeal.

Issues

The Supreme Court had to decide:

• Whether the First Council Non-life Insurance Directive 73/239/EEC (as amended by Directive 84/641/EEC) precluded member states from regulating insurance business falling outside, or wider than, the eighteen standard classes in its Annex — at least within the same legislative provisions transposing the Directive.
• Whether, as a matter of English law, the appellants’ benefits-in-kind extended warranty contracts fell within Class 16 of Schedule 1, Part I to the Regulated Activities Order.
• Whether the Schedule had to be read as impliedly excluding insurance providing benefits in kind, by virtue of EU-conforming construction or the principle that language derived from another instrument takes its established meaning.

Arguments

For the appellants, Ms Lesley Anderson QC argued that Classes 1 to 17 of the Annex to the First Directive did not extend to insurance providing benefits in kind, and that in transposing the Directives member states could regulate neither wider nor narrower classes of direct non-life business. The Regulated Activities Order therefore had to be construed as applying only to contracts providing pecuniary benefits. She accepted that member states could regulate additional categories of direct non-life business, but only by a distinct enactment identifying distinct additional categories, not by redefining Directive classes more broadly. She also accepted that Class 18 (“Assistance”) did extend to benefits in kind — but the Authority did not seek to bring the case within Class 18.

The Authority, represented by Mr Jonathan Crow QC, successfully maintained the position accepted below: the contracts fell within Class 16 and the Directive did not constrain the UK’s ability so to legislate.

Judgment

Lord Sumption gave the sole judgment, with which Lord Neuberger, Lady Hale, Lord Mance and Lord Clarke agreed. The appeal was dismissed.

The scope of the Directive

Lord Sumption shared the Court of Appeal’s doubts as to whether Classes 1–17 really excluded benefits in kind, but declined to decide on that basis, noting that the question “could be finally resolved only by a reference to the Court of Justice”. He identified a more fundamental flaw in the appellants’ case:

“It is in my view clear that the First Directive is concerned only to prescribe what kinds of business national law must regulate and not what other kinds of business it may regulate. Still less is it concerned with the legislative technique that member states may employ to regulate other kinds of business to which the Directive ex hypothesi does not apply.”

He traced the history of UK insurance regulation from the Life Assurance Companies Act 1870, through the Insurance Companies Act 1958, Part II of the Companies Act 1967 (which first brought “pecuniary loss insurance business” within regulation) and the Insurance Companies Act 1974, to the Directive-based regime. The First Directive’s legal base was Article 57(2) EEC (freedom of establishment); its objects were limited uniformity in authorisation principles and a common solvency margin regime. Authorisation rules in Articles 6–12 were partial only; solvency assessment under Article 16.3 required account to be taken of all direct business, including business outside the standard classes, consistently with Article 8.1(b) requiring insurers to limit themselves to insurance business generally.

The standard classes mattered only for the content of the “scheme of operations” and for calculating the minimum guarantee fund under Article 17.2; neither would be undermined by member states regulating wider categories. The recitals confirmed the partial character of harmonisation: Recital (2) of the original Directive spoke of eliminating “certain divergencies”, and Recitals (2) and (3) of the 1984 amending Directive showed that benefits-in-kind insurance was already being regulated nationally. The Second Directive 88/357/EEC and Third Directive 92/49/EEC introduced passporting by reference to the standard classes, and the Third Directive’s recitals spoke of “minimum standards”, stricter home-state rules being permissible.

Lord Sumption added that no rational reason existed for the EU legislator to prevent national regulation outside the standard classes; the consequence would be business carried on “without any regulatory protection for consumers whatever”. Of the appellants’ concession, he observed at that it “is a tribute to her forensic realism. But it contributes nothing to the coherence of her case.”

Class 16 of the Regulated Activities Order

The classes define regulated business by reference to the nature of the risk insured (citing Phoenix General Insurance Co of Greece SA v Halvanon Insurance Co Ltd [1988] 1 QB 216, 262). Class 16’s wording derived not from the Annex but from the definition of “pecuniary loss insurance business” in section 83(6) of the Insurance Companies Act 1974, itself taken from section 59(7) of the Companies Act 1967. Lord Sumption endorsed Warren J’s reasoning that the risk covered — breakdown or malfunction — is the same whether the cover is repair/replacement or indemnity, saying “I agree with this analysis and cannot improve on it.”

He rejected an implied exclusion of benefits in kind. At common law insurance covers a contract “for the payment of a sum of money, or for some corresponding benefit” (Prudential Insurance Co v Inland Revenue Commissioners [1904] 2 KB 658, 664, Channell J; Department of Trade & Industry v St Christopher Motorists Association Ltd [1974] 1 WLR 99, 105, Templeman J). Assuming in the appellants’ favour that the Directive excluded benefits in kind, neither relevant principle applied: the Marleasing principle (Marleasing SA v La Comercial Internacional de Alimentación SA (Case C-106/89) [1990] ECR I-4135) required only that the domestic classes be no narrower than the Directive’s; and the weaker principle that borrowed language carries its established meaning could not apply because Class 16’s language came from domestic pre-Directive legislation, not the Annex. Whether the business fell within Classes 8 or 9 therefore did not arise.

Implications

The decision confirms that the Non-life Insurance Directives operate as a floor, not a ceiling: they prescribe what must be regulated, leaving member states free to regulate further or wider categories of insurance business, and free to choose the legislative technique for doing so, including within the same instrument transposing the Directive. Correspondingly, conforming construction under Marleasing obliges a domestic court to read the domestic classes as no narrower than the Directive’s, but does not require them to be read down.

For practitioners, the key practical consequence is that providers of extended warranty or service-plan products offering repair or replacement only — with no obligation to pay money — may be effecting or carrying out contracts of insurance within Class 16 and so require FSMA authorisation; carrying on such business unauthorised exposes the provider to winding up in the public interest under section 367 FSMA. Such an insurer will not, however, obtain passporting rights in other member states for business outside the standard EU classes.

The decision has limits. The Court expressly declined to decide whether Classes 1–17 of the Annex exclude benefits in kind, doubting the appellants’ premise but leaving the question for a possible CJEU reference. The characterisation of the contracts as insurance at common law was an unchallenged assumption rather than a finding, and the position under Classes 8, 9 and 18 was not determined. The case is nonetheless significant in delineating the relationship between minimum EU harmonisation and domestic regulatory scope, and in confirming the breadth of Class 16’s domestically derived wording.

Verdict: The appeal was dismissed. The Supreme Court (Lord Sumption, with whom Lord Neuberger, Lady Hale, Lord Mance and Lord Clarke agreed) upheld the decisions of Warren J and the Court of Appeal: the appellants’ benefits-in-kind extended warranty contracts fell within Class 16 of Schedule 1, Part I to the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, the First Non-life Directive did not preclude the United Kingdom from regulating wider categories of insurance business, and the winding-up orders made in the public interest under section 367(1)(c) FSMA therefore stood.

Source: Digital Satellite Warranty Cover Ltd & Anor v Financial Services Authority [2013] UKSC 7