Supreme Court upholds FSA's power to regulate extended warranties

In its judgment, the Supreme Court upheld an earlier High Court ruling that the warranties were "contracts of insurance" and so required FSA authorisation to operate. The cover offered by the two companies, Digital Satellite Warranty Cover (DSWC) and Satellite Services, extended to the repair or replacement of satellite television equipment in the event of breakdown, malfunction or physical damage.

Tracey McDermott, the FSA's director of enforcement and financial crime, said that the decision was "important".

"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," she said. "The judgment will help protect consumers from inadvertently dealing with unauthorised businesses that offer similar cover."

She added that the decision would help other firms that offer warranties to understand the circumstances in which they might require regulator authorisation. The new Financial Conduct Authority (FCA) will take on the FSA's consumer protection remit when the FSA is dissolved in April.

The Financial Services and Markets Act (FSMA), which governs the type of activities that must be authorised by the FSA, gives the regulator the power to prevent firms from carrying out regulated activities if they have not been authorised to do so. Regulated activities include a wide range of general insurance business, including insuring against the risk of loss attributable to the insured person "incurring unforeseen expense [or] ... any other kind of risk".

DSWC and Satellite Services offered Sky TV customers cover described as an "extended warranty" for satellite television equipment in return for insurance premiums of between £6.49 and £11.49 per month. As part of the warranty, customers were promised unlimited call outs covering all parts and labour costs. DSWC made approximately £10 million in profit in 2010, while Satellite Services turned over £2.1m worth of business in the same period.

The FSA obtained winding up orders from the High Court against the two companies in January 2011, on the basis that the firms were offering the equivalent of contracts of insurance to consumers without FSA authorisation. The companies' subsequent appeals were dismissed by the Court of Appeal in November 2011 and they remain in liquidation, according to the FSA.

In his judgment Lord Sumption upheld the High Court's reasoning. He quoted the words of High Court judge Mr Justice Warren who had said that a "contract for repair or replacement only in the event of breakdown or malfunction which does not oblige the insurer to indemnify the insured for costs which the insured himself incurs" was nevertheless a contract for insurance.

"I do not consider that there is any material distinction when it comes to determining whether a contract falls within [the definition] between a contract which provides only for repair or replacement and one which also provides an indemnity for costs actually incurred by the insured," Mr Justice Warren said.

"In each case, the risk covered is essentially the same; it is the possibility of the equipment breaking down or malfunctioning. It is the cover, not the risk, which is different in the two cases. If the equipment does break down or malfunction, then it is inevitable that the insured will need to incur cost if he is to have a set of working equipment: he will either have to pay for its repair or he will have to replace it," he had said. "In my view, a contract which brings about the result which he would otherwise have to pay to achieve (ie having functioning equipment) can properly be categorised as a contract which protects him from financial loss."