Legal perspectives

In this feature l fSmA l insurance l PErG Satisfaction guaranteed? Whats the real deal with extended warranties and the Financial Ombudsman? William hibbert investigates While warranties provided by third parties will be seen as regulated insurance, suppliers who sell their own extended warranties would appear to be beyond the scope of the ombudsman G oods are often supplied with extended warranties from the retailer or from a third party, which last much longer than the standard 12 months. When customers have cause to complain about the service they receive under such warranties, they may go to their local trading standards department for advice on what to do. One route to consider may be the Financial Ombudsman Service. Financial Ombudsman The Financial Ombudsman Service may have jurisdiction in a dispute over what, on the face of it, appears to be a mere service contract because some warranties can be considered to be insurance. The making and implementing of contracts of insurance are regulated activities under the Financial Services and Markets Act 2000 (FSMA), and the Financial Ombudsman Service has jurisdiction to adjudicate on complaints about regulated activities. Moreover, if an extended warranty is insurance, and the supplier is not authorised by the Financial Conduct Authority to carry on an insurance business, the cost of the insurance may be recoverable by the consumer and there will be regulatory issues for the supplier. This sounds like a useful weapon in the consumers armoury, but it may not be of such value as it first appears, particularly with the recent coming into force of the Consumer Rights Act 2015. Contract of insurance Unhelpfully, the FSMA does not explain what a contract of insurance is, so one has to turn to judicial decisions about which contracts amount to insurance. English case law has established three elements in a contract of insurance: The insured provides consideration usually, but not necessarily, in the form of a payment The insured is promised a benefit in return, in money or moneys worth The benefit becomes due on the happening of an event that is not certain to occur and which, it is often said, has to be adverse to the insured 1 2 3 The contents of this column do not necessarily reflect the views of CTSI, nor do they always take account of the law in Scotland TaP TO naVigaTe Pages 1 2 3 4 5 Credits Published You might also like William Hibbert is a barrister at Tuesday 29 September, 2015 Balancing the needs of consumers and Henderson Chambers. lenders September 2015 Images: axako / Shutterstock To share this page, click on in the toolbar Clearly, where a person contracts to provide for an items repair or replacement (something that is of moneys worth) on the happening of a breakdown an event that is not certain to occur this is capable of being a contract of insurance regulated by FSMA. Indeed, this was held to be the case with the extended warranties sold in Digital Satellite Warranty Cover Ltd v Financial Services Authority [2013] 1 W.L.R. 605, acase that went to the Supreme Court over the issue. It was significant in that case, however, that the extended warranty was provided by a third party, which was unconnected to the manufacture, production or supply of the equipment in question. Suppliers extended warranty What happens if it is the supplier who is offering the extended warranty? The courts have long recognised that there are contracts that contain the three constituent elements of a contract of insurance, but that are not insurance. The difficulty is in drawing the line. Insurance is often described as an elephant difficult to describe, but you recognise it when you see it. One area of difficulty is warranties. The Financial Conduct Authoritys handbook, in its Perimeter Guidance (PERG), seeks to explain the boundaries of regulated activity and recognises that not all extended warranties are insurance. So how do you distinguish between contracts that are mere warranties and where the Financial Ombudsman Service cannot help and contracts of insurance? PERG suggests a contract is more likely to be regarded as a contract of insurance if it is described as insurance, but it is the substance of the contract that is more significant. Similarly, the supplier may undertake a warranty obligation to the customer in a separate contract with the customer, distinct from the contract for the supply of goods or services. Suppliers obligation PERG suggests the mere existence of a separate warranty contract is unlikely to be conclusive by itself. Instead, the key lies in the relationship between the suppliers obligation to supply goods of satisfactory quality and the extent to which the warranty obligation mirrors this. If the warranty does no more than provide for benefits that are of the same nature as a suppliers usual obligations on the quality of the goods, PERG suggests this is not insurance. According to PERG, an obligation is likely to be of the same nature as the suppliers usual obligations on the quality of goods if it is an obligation of the seller to the buyer assumed by the seller in consideration of the purchase price that: Implements, or bears a reasonable relationship to, the sellers statutory or common law obligations on the quality of goods or services of that kind; or Is a usual obligation relevant to quality or fitness in commercial contracts for the sale of goods or supply of services of that kind. 1 2 On the other hand, an obligation in a contract of sale or supply is unlikely to be of the same nature as the suppliers usual obligations on the quality of goods or services, if that obligation has one or more of the following features: It is assumed by a person other than the supplier a third party, as in the Digital; or It is significantly more extensive in content, scope or duration than a sellers usual obligations as to the quality of goods or services of that kind. 1 2 Financial Ombudsmans jurisdiction In summary, it would appear from PERG that the Financial Ombudsman Service will not have jurisdiction if the warranty provides an obligation that is not significantly more extensive in content, scope or duration than the suppliers usual obligations on the quality of the goods or services, or is of the same nature as those obligations. The obligation will be of the same nature if it bears a reasonable relationship to the suppliers statutory or common law obligations on the quality of goods or services of that kind. What then are the usual obligations of a supplier? Consumers rights under contracts for the sale and supply of goods which include hire-purchase agreements and hire contracts have, for a long time, included an implied term that the goods, at the time of supply, must be of satisfactory quality. This means of a quality that a reasonable person would consider satisfactory, taking into account matters such as its description, the price and any other relevant circumstances. This implied term is now to be found in section 9 of the Consumer Rights Act 2015. One aspect of satisfactory quality is durability. Goods purchased can be expected to last for a reasonable time before they break down but what is a reasonable degree of durability? Each case will, of course, vary, depending on circumstances. Clearly a latent fault that emerges over time where the fault was present, but hidden, at the time of the supply will be a breach of satisfactory quality, but durability is more than just preventing latent faults. All goods will suffer from wear and tear as they are used over a period of time. Even if they do degrade through normal use, however, they can still be expected by the reasonable person the touchstone for satisfactory quality to last for a reasonable period, from the time of supply, before they break down. Warranty as insurance? With the increased reliability of home appliances the most common items for which consumers buy an extended warranty goods may reasonably be expected to be designed and manufactured to last several years before they break down, even through normal wear and tear. This has an impact on whether a warranty is insurance. If a supplier can reasonably be expected to supply goods that will last for several years before breaking down through fair wear and tear, an extended warranty promising repair or replacement for any fault or breakdown other than for, say, accidental damage over a period of three years does appear to have a reasonable relationship with the suppliers statutory obligations. It is not to be described as significantly more extensive in content, scope or duration than the suppliers usual obligations. This is all the more true in cases of contracts for hire-purchase that run over several years. The reasonable consumer might expect the goods hired to last at least for the period of the hire so that, when the option to purchase comes to be exercised, the goods would still be worth purchasing. Further, repairing or replacing goods may be seen as merely a way of remedying in moneys worth something that the supplier might be liable for in money damages. Offering a repair and replacement service under an extended warranty is arguably not a significant extension of the scope of the suppliers usual liability. Moreover, the new Consumer Rights Act 2015 places an obligation on the supplier to repair or replace goods that are in breach of the implied term of satisfactory quality, including durability. the end result This obligation is not limited in time; if it can be established that the goods were not of satisfactory quality at the time of the initial supply, then the consumer can demand a repair or replacement whenever the fault develops. In those circumstances, the extended warranty comes to look so similar to the statutory obligations of the supplier that it makes it very difficult to argue that it is insurance. If it is not insurance, the Financial Ombudsman Service has no jurisdiction. While warranties provided by third parties will be seen as regulated insurance in the light of PERG and the Digital Satellite Warranty case and, therefore, subject to the Financial Ombudsman Services jurisdiction suppliers who sell their own extended warranties would appear to be beyond the scope of the ombudsman.