The Financial Services Authority has been active in January 2012, publishing two sets of finalised guidance in relation to the Unfair Terms in Consumer Contracts Regulations 1999 (the “Regulations”). The relevance of the Regulations is that a term of a standard consumer contract which is deemed by a court to be unfair is not binding on the consumer. Additionally, if a term is deemed by a court not to be written in plain and intelligible language, then the court can interpret that term in favour of the consumer.
The first statement of finalised guidance relates to the narrow issue of terms in interest-only mortgage contracts that allow firms to switch their mortgage customers from an interest-only mortgage to a repayment mortgage (“Switching Terms”). The guidance indicates the FSA’s view that where a Switching Term give the firm too broad a discretion to determine when that term might apply, then it is likely to be unfair under the Regulations. Firms are encouraged to ensure that their standard consumer contract terms, and particularly any Switching Terms are not unfair and that they are drafted in plain, intelligible language in light of the requirements of the Regulations.
The second statement of finalised guidance provides a commentary on the types of contract term which the FSA commonly find to be of concern under the Regulations. The statement links the requirements of the Regulations to the Principles of Business set out in the FSA’s Handbook, and in particular the requirements that firms treat their customers fairly, and that information, including contracts, is communicated in a way that is clear, fair and not misleading. The contract terms addressed by the guidance are terms which give the firm:
- the right to vary the contract unilaterally, and particularly the concepts of “valid reasons”, “notice” and “freedom to dissolve the contract” relevant to determining whether a unilateral variation term is unfair.
- the right to terminate the contract and the key consideration of the effect on the consumer if the firm cancels the contract, both in terms of inconvenience and cost.
- discretion to exercise contractual powers, and in particular where firms give themselves excessive discretion over the circumstances in which they will exercise their contractual powers.
- the right to transfer its obligations under the contract, and particularly the risk that a transfer of a firm's obligations may reduce the consumer's rights under the contract.
The guidance also sets out the FSA’s views on terms that are not in plain and intelligible language, leaving consumers unable to fully understand the terms of the contract they have entered into. In the FSA's view, words and expressions such as “indemnity”, “consequential loss” and “time is of the essence” have a specific legal or technical meanings that are not readily understood by the average consumer.
The FSA expects all firms to take positive and proactive action to ensure that their contract terms are clear and fair under the Regulations. This includes ensuring that they have adequate systems and controls in place to achieve this. Morton Fraser can help firms discharge these obligations by auditing their consumer contracts against the Regulations and for TCF compliance.