The Financial Services Authority (the "FSA") has recently published finalised guidance on the scope of the Unfair Terms in Consumer Contracts Regulations 1999 (the "UTCCRs") for authorised firms. It will come as no surprise that the FSA expects firms to take a proactive approach to ensure that the terms of their consumer contracts are clear and fair in accordance with the UTCCRs.
The FSA has reiterated its previous position in relation to the UTCCRs and, in many ways, this guidance contains relatively few surprises. The guidance draws attention to the types of contractual terms which are commonly found to be unfair and primarily focuses upon contractual terms which give firms the right unilaterally to vary or terminate a contract. The guidance also comments upon contractual terms which give firms a discretion to exercise contractual powers, rights to transfer obligations under a contract and contractual terms that are not in plain and intelligible language.
Unilateral variation of a contract
Perhaps the most notable issue raised in this guidance is in relation to contractual terms permitting a firm unilaterally to vary a contract. The FSA is concerned that firms often reserve themselves too much discretion as to if, when and how they will make changes to a contract and that unilateral variations raise the potential for unfairness. The guidance sets out circumstances in which the unilateral variation of terms is less likely to be considered to be unfair, including:
- where there is a valid reason specified in the contract; or
- for variations to interest rates or other charges, where the terms provide for a valid reason (which is not specified in the contract) and the contract provides that the consumer will be given notice at the earliest opportunity and is free to dissolve the contract immediately; or
- for a contract of indeterminate duration, where the contract provides for the firm to give the consumer reasonable advance notice of the change and the consumer is free to dissolve the contract.
The FSA remains concerned that, notwithstanding the indication given in the UTCCRs that "valid reasons" can help to make a unilateral right to vary less likely to be unfair, some firms still fail to identify any such valid reasons in their contracts. The guidance provides examples of terms which are likely to constitute valid reasons for unilateral variations and others which are unlikely to satisfy this threshold. For example, terms which allow a firm unilaterally to vary a contract to cover unexpected costs or solely to increase profit margins fall within the latter category. Moreover, simply stating that a contract can be altered "for any other valid reason" is not an example of a valid reason in itself and therefore does not constitute a valid reason which is specified in the contract.
The FSA guidance also emphasises the importance of giving sufficient notice to consumers thereby decreasing the likelihood that terms permitting the unilateral variation of a contract will be deemed to be unfair. In particular, the guidance highlights that, in circumstances where contracts of indeterminate duration are varied unilaterally, then consumers should be given reasonable notice in advance and should be able to elect to exit the contract.
The UTCCRs state that advance notice of unilateral variations to interest rates and charges may not be required where there is a valid reason, provided that the consumer is given notice at the earliest opportunity and is free to dissolve the contract immediately. For completeness, the guidance indicates that unilateral variations to interest rates and charges are unlikely to be unfair where advance notice is given to the consumer. However, paragraph 3.13 of the guidance is phrased in such a way that it could be interpreted as meaning that valid reasons will always be required for unilateral changes to interest rates or charges.
If such an interpretation is correct, this could have a significant impact on the financial services industry because consumer contracts often contain terms which reserve the firm's right to make unilateral variations for any reason (valid or not) provided that the consumer is given sufficient advance notice. It seems unlikely that the FSA intended the guidance to be interpreted in this way as such an approach would be inconsistent with the requirements of the Payment Services Regulations, which provide for advance notice of any such rate change but do not expressly require there to be a valid reason for such change.
Although there are arguments to the contrary, it seems likely that rate changes in contracts of indeterminate duration also fall within the scope of the second paragraph of paragraph 2(b) of Schedule 2 to the UTCCRs, which does not require valid reasons, provided the consumer is given reasonable advance notice and has the right to dissolve the contract, and the FSA's guidance does not impact this interpretation.
Freedom to dissolve contracts
The guidance reminds firms that financial and practical barriers which prevent a consumer from exiting a contract following unilateral variation may render its terms unfair. Firms can remove such financial barriers by waiving any exit fees for terminating a contract following unilateral variation. Further, firms should consider the impact of any product-specific practical barriers to termination which the consumer may encounter.
The guidance highlights the FSA's continuing focus on the fairness of terms in consumer contracts. Firms should continue to take positive steps to review the fairness of their contractual terms on a regular basis, particularly those which have been flagged by the FSA's guidance. The FSA has made it clear that unfair, unclear or contradictory terms and terms which do not reflect how the firm will act in practice are all indicative of poor systems and controls.
Although the guidance provides some helpful indications of the steps which firms can take to reduce the likelihood that their contractual terms are unfair, it is worth bearing in mind that ultimately the court has the discretion to decide whether a particular term fails to satisfy the UTCCRs.