Unfair Contract Terms. Finalised Guidance (12/07)

6 February 2012

Introduction

The FSA have published this statement because they are concerned about the regularity with which they still see examples of terms that are either unclear or unfair in spite of having published a large amount of information about the fairness of contract terms. Firms can also refer to guidance and undertakings published by thee office of Fair Trading and determinations of the Financial Ombudsman Service (FOS). There is an ongoing expectation that Firms will consider this statement and ensure that their customer contracts are clear and fair.

The Statement

This statement provides a commentary on the types of contract term which the FSA have found to be of concern under the Regulations. Typically these are terms giving the firm:

The unilateral right to vary the contractThe right to terminate the contractDiscretion to exercise contractual powersThe right to transfer its obligations under the contractTerms that are not in plain and intelligible language.

Disclaimer

FSA are keen to point out that they cannot approve terms for the purposes of the Regulations since the fairness or otherwise of these terms can only be adjudged by a court. Thus it is for individual firms to ensure that their terms are clear and not unfair, in the context of the product or service in question. All that FSA are doing in this commentary is to raise awareness of the types of issues that FSA identify as being of concern and to restate that it is the individual firm's responsibility.

Scope and status of this Statement

This is general guidance but not handbook text and it is addressed to firms authorized and regulated by the FSA in relation to products and services that are within the FSA's regulatory scope. Clearly the firm's professional advisers will also be interested. This applies to contracts entered into since 1 July 1995.

Unfair contract terms: improving standards in consumer contract. Terms providing the firm the right to unilaterally vary the contract

Terms that allow firms to make unilateral changes to vary the contract are the most common type of potential unfairness. Terms are less likely to be unfair if there is a valid reason for the variation spelled out in the contract and said contract gives the consumer early notice and allows the consumer the freedom to dissolve the contract immediately. What is sufficient for notice will differ according to the product in question and the type of variation. FSA are calling for clear definitions of the meaning of 'valid". Such reasons must be exhaustive and not conclude with the general statement "and any other valid reason".

FSA are unlikely to object to a term that states that unilateral variations may be made:

to respond proportionately to changes in general law or decisions of the Financial Ombudsman Service;
to meet regulatory requirements; to reflect new industry guidance and codes of practice which raise standards of consumer protection;
to respond proportionately to changes in the Bank of England base rate, other specified market rates or indices or tax rates;
or to reflect proportionately other legitimate cost increases or reductions associated with providing the particular product or service.

Freedom to dissolve the contract

This may be a factor in reducing the possible unfairness of contract terms. However, beware of exit charges that may put up a financial barrier. Changes to rates of interest may be considered less unfair if the consumer is able to dissolve the contract e.g. mortgage products.

Terms providing the firm the right to terminate the contract

Unfair cancellation terms are according to FSA one of the most frequently occurring types of unfair contract terms. A key issue is the impact on the consumer in terms of inconvenience and/or cost.

Contracts of determinate duration

The FSA take the view that in the case of contracts of determinate duration a term that allows the firm a wide discretion to cancel the contract has the potential to be unfair.

Contracts of indeterminate duration

FSA recognize that this may happen but point out that it is necessary both to give proper notice in advance and to provide a genuine valid reason.

Terms giving firms discretion to exercise contractual powers

In principle, there are no objections to terms which give firms an element of discretion in order to operate efficiently. However, FSA are concerned about terms which give excessive discretion to firms as to if, when or how they will be able to exercise their contractual powers.

Terms giving the firm the right to transfer its obligations under the contract

Terms which reserve the right for a firm to transfer its rights and obligations to a third party often cause concern under the Regulations where the transfer may serve to reduce the guarantees for the consumer, without the latter's agreement. In the view of FSA, terms which permit a firm to transfer its rights and obligations to a third party or terms that are not in plain and intelligible language are likely to be unfair.

Unclear terms are of particular concern because they leave consumers unable to understand fully the terms of the contract they have entered into. Avoid technical or legal jargon such as 'indemnify', 'tort', 'lien', 'consequential loss', 'force majeure' and 'time is of the essence' have specific legal or technical meanings which are not readily understood by the average consumer. Where there is ambiguity a court will construe the term in favour of the consumer.

FSA Summary

Firms need to ensure that their contract terms are clear and not unfair under the Regulations and meet their obligations to treat their customers fairly. As stated at the outset, FSA have published a large amount of information about the fairness of contract terms, and firms can also refer to guidance and undertakings published by the Office of Fair Trading and determinations by the Financial Ombudsman Service. Unfair terms, unclear terms, contradictory terms and terms that do not reflect how the firm will act in practice are all issues which indicate poor systems and controls in relation to consumer contracts. Factors such as how contracts are signed-off at the product development stage and to what extent contracts remain in compliance with developments in law and regulation throughout the lifetime of a product are also indicative of the robustness of systems and controls in this area. With the publication of this Statement, FSA expect to see all firms taking positive and proactive action to ensure that their contract terms are clear and fair under the Regulations, including ensuring that they have adequate systems and controls in place to achieve this.

You can see the full document here. If you have queries about this bulletin please contact your CPA Account Manager.

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