In this article, written for Compliance Monitor, Nicholas Ralph of Dentons looks at how the unfair terms provisions of the CRA may impact financial services firms.
The Consumer Rights Act 2015 (CRA), which received Royal Assent on 26 March 2015, delivers a wholesale overhaul of the UK's consumer rights regime. The CRA consolidates and update various pieces of UK legislation, so that, for the first time, the majority of consumer rights in respect of contracts to provide goods or services are now set out in one place.
Of particular interest to financial services firms are the CRA reforms relating to unfair terms in contracts, replacing provisions currently set out in the Unfair Contract Terms Act 1997 (UCTA) and the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs).
The changes to the law on unfair terms are expected to take effect on 1 October 2015, when most of the CRA comes into force. In this article, Nicholas Ralph of Dentons looks at how the unfair terms provisions of the CRA may impact financial services firms.
What contracts will be subject to the CRA?
Not all contracts will be affected by the CRA; the unfair terms regime only applies to contracts with "consumers"; individuals acting for purposes that are "wholly or mainly outside that person's trade, business, craft or profession". However, this is a slight departure from the position under the UTCCRs, which define a consumer as someone acting entirely outside of business.
This change may be of particularly relevance to financial services firms dealing with sole traders and micro-enterprises, where a customer may obtain a benefit under an agreement both as an individual and as part of their business (e.g. a loan to create office space for a small business at their main residential address).
Additionally, a business that claims an individual is not a consumer bears the burden of proving that issue. Some of the case law on the definition of a consumer may well need to be revisited by the courts in light of the CRA's slightly wider definition of a consumer.
When will consumer contracts be subject to the CRA?
While no transitional provisions have been published, we expect that the provisions of the CRA dealing with unfair terms will automatically apply to all consumer contracts subsisting at the time the unfair times sections of the CRA are brought into force (currently expected to be October 2015), as well as all new consumer contracts entered into after that date.
Changes to unfair terms law
The law on unfair terms in contracts is currently primarily contained in two pieces of UK legislation: UCTA, which deals with terms in contracts which attempt to limit or exclude liability for negligence or breach of contract, and the UTCCRs, which deal more generally with the fairness of contracts between businesses and consumers.
The UTCCRs are repealed entirely by the CRA, whilst UCTA is heavily reduced and amended so as to deal only with business to business (rather than consumer) contracts. All of the UCTA and UTCCRs provisions dealing with unfair terms in consumer contracts are now contained in the CRA.
Same strategy, wider scope
Broadly, the aim of both the new CRA and the current UTCCRs/UCTA regimes is to render unenforceable various contractual terms that are regarded as unfair (or, in the language of UCTA, unreasonable). Typically, a consumer will seek to argue that a term is unfair where it relates to the payment of sums owing under a loan or other credit agreement, or where it otherwise gives rise to a liability to pay a financial services firm. Where a court finds a term to be unfair, it cannot be enforced against the consumer.
The basic strategy for both the courts and the FCA in considering whether a term is unfair under both the current and the new CRA regimes remains the same: initially they will decide whether a term is of a sort that should be assessed for fairness. If a term is capable of being so assessed, this is followed by an assessment for fairness itself. If a term is then assessed as unfair, the term may not be relied on by the firm which imposed it on a customer.
Additionally, the Financial Conduct Authority (FCA) may review agreements covering particular products or services, and require firms to amend their standard contractual documentation so that unfair terms are removed, and will usually publish a notice announcing its findings, highlighting the name of the particular firm that has unfair agreement terms, and detailing the corrective action it must take to remove or amend the terms that cause unfairness. If an unfair term features in your standard agreements it may therefore result in both unenforceable agreements with consumers and also create adverse publicity for the firm if the FCA intervenes on its own initiative to require the amendment or removal of the unfair term.
The general position under the CRA
Section 62 (1) largely replicates the position under the UTCCRs. It states:
"An unfair term of a consumer contract is not binding on the consumer...
(3) This does not prevent the consumer from relying on the term or notice if the consumer chooses to do so.
(4) A term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations under the contract to the detriment of the consumer.
(5) Whether a term is fair is to be determined -
(a) taking into account the nature of the subject matter of the contract, and
(b) by reference to all the circumstances existing when the term was agreed and to all of the other terms of the contract or of any other contract on which it depends."
The way in which this section is drafted is not dissimilar to the wide scope of the "unfair relationships" test that was introduced a few years ago under the Consumer Credit Act 1974 (CCA). Clearly, the relative complexity of some financial services contracts, and the way in which they are marketed and sold (e.g. by telephone or over the internet) will have a bearing on any fairness assessment undertaken by a court or the FCA.
What terms may be assessed for fairness under the CRA?
Whilst many of the provisions of the UTCCRs/UCTA remain essentially unchanged as incorporated into the CRA, a number of key differences can be identified. Summarised below are the important changes to the scope of the fairness assessment under the CRA, contrasted against the current position under the UTCCRs or UCTA. In each case some potential practical issues that may arise as a result of the changes under the CRA regime are highlighted.
1. The exemption for core terms - subject matter and price - only if transparent and prominent
Under the CRA, a term of a consumer contract is not subject to a fairness assessment where the term:
- specifies the main subject matter of the contract; or
- relates to the appropriateness of the price payable under the contract by comparison with the goods, digital content or services supplied under it.
Under Section 64 of the CRA, these two exemptions from the fairness assessment are only available where the term is both transparent (meaning legible and expressed in plain and intelligible language) and prominent (meaning brought to the consumer's attention in such a way that the average consumer would be aware of the term). The second test of prominence is a significant change - if a core term relating to the main subject matter or price of the services is not sufficiently prominent, it will lose the exemption and be subject to a fairness assessment. Under the UTCCRs, there was only a requirement for plain and intelligible language and it did not matter if a core term was tucked away at the back of an agreement.
What does this change mean in practice?
- Firms should ensure that terms relating to both the real subject matter of the agreement and the price are suitably prominent, and highlighted at the start of agreements. This may mean that the arrangement of agreements needs to be considered, so that they do not follow a more rigid legal or "logical" approach. The starting point should be for your business to ask itself: what does the consumer really need to know about and what are the main features of this agreement?
- If a core term specifying the subject matter or price payable is not sufficiently prominent or transparent, it may be assessed for fairness. If a term relating to price is subject to such an assessment, the very fact that it is not prominent may lead a court to conclude that it is unfair.
- This change to introduce a prominence requirement also reflects the Law Commission's recommendations following the 2009 Supreme Court decision in Office of Fair Trading v Abbey National plc (relating to overdraft charges on current accounts, and whether they could be subject to a fairness assessment under the UTCCRs). The new CRA requirements seek to make clearer those subject matter and price terms that can be subject to a fairness assessment.
2. All communications to a consumer - not just the contractual terms
All "announcements, whether or not in writing, and any other communication or purported communication" which seek to limit a firm's liability to a consumer, or otherwise relates to the rights and duties between the firm and consumer may be assessed for fairness.
The CRA considerably widens the scope of what may be assessed for fairness, beyond the usual contract terms documented in a customer agreement. The UTCCRs do not apply to non-contractual communications (either oral and written). UCTA applies only in a limited way to non-contractual notices, to the extent that they attempt to exclude liability for negligence or breach of certain contractual duties.
Notices provided in connection with a contract are now expressly covered and subject to a fairness assessment. If a notice given to a customer (or displayed where they might see it - e.g. on a website or in business premises) includes wording that relates to the rights or obligations between a trader and a consumer, or which appears to exclude or restrict a business' liability to a consumer, then it can be subject to a fairness assessment.
What does this change mean in practice?
- Your general marketing materials, and not just information provided directly to an individual consumer pursuant to an agreement will be subject to a fairness assessment under the CRA where it is reasonable to assume that a communication would be seen or heard by the customer for it to be subject to a fairness assessment.
- For example, information communicated in media advertising campaigns or other promotional material distributed via branches or employees face-to-face, may, if it relates (even in part) to the rights or obligations of either party, or which appears to exclude a business' liability to a consumer, be subject to a fairness assessment.
3. Individually negotiated terms can be assessed for fairness
The CRA does not distinguish between individually negotiated and standard or non-negotiated terms: all terms of a contract can be assessed for fairness. This means that individually negotiated terms will, for the first time, be capable of being assessed for fairness. Under the UTCCRs terms that were individually negotiated between the parties could not be assessed for fairness (provided they were legible and transparent).
What does this change mean in practice?
- While this may have little impact on many retail financial services firms dealing with consumers, those firms dealing with high-net worth customers or "professional clients" who may still be categorised as a consumer for the purposes of the CRA, and where some agreements may have terms that are "individually negotiated", will need to consider whether those agreement terms are fair. This is particularly the case where some key provisions or pricing arrangements are not currently given prominence in the documentation, or where a term might fall within the "grey list" of terms that are likely to be regarded as unfair (discussed further below).
- For negotiated terms that are now within the scope of the unfairness assessment, the fact that a term has been individually negotiated, and the relative bargaining position of the business and the consumer, would likely have some weight in the overall evidential assessment of the term's fairness.
4. An extended "grey list" of indicative unfair terms
The CRA retains the "grey list" set out in the UTCCRs, but adds some additional categories. The grey list provides an indicative (and non-exhaustive) list of those types of contractual terms that may be unfair; however, inclusion on the list does not mean a term in your agreement is automatically unfair, and, equally, omission from the list does not mean that a term will be regarded as fair. Generally, you will want to avoid having any terms that might be considered to fall into any of the "grey list" categories.
The CRA contains the following additional items on the grey list, not currently specified in the UTCCRs which will generally be regarded as unfair terms:
- Disproportionately high exit fees - terms requiring a consumer to pay a "disproportionately high sum in compensation or for services which have not been supplied." This sits alongside a current grey list item regarding terms which permit firms to retain sums paid by a consumer in cases where the consumer has decided to withdraw from the contract;
- Subject matter determined after agreement - terms which have "the object or effect of permitting the trader to determine the characteristics of the subject matter of the contract after the consumer has been bound by it."; and
- Price determined after agreement - terms which have "the object or effect of giving the trader the discretion to decide the price payable under the contract after the consumer has become bound by it, where no price or method of determining the price is agreed when the consumer becomes bound." Of note to financial service firms however, is an exclusion which stops this grey list item from having relevance to contracts for the transfer of "transferable securities, financial instruments and other products or services where the price is linked to fluctuations in a stock exchange quotation or index or a financial market rate that the trader does not control" or for the purchase of foreign currency.
The CRA provides some exceptions to the certain grey list items for financial service firms. For example, both the UTCCR and CRA grey lists include a term allowing a firm to vary a contract without a valid reason. The CRA provides that this does not apply to financial service providers who have reserved a right to alter interest rates in a contract, provided that the consumer is informed and has the right to terminate the contract immediately. In general, however, the grey list exceptions are limited.
The Competition and Markets Authority (CMA) has issued new draft guidance on unfair terms in consumer contracts under the CRA, as part of a consultation. One of the documents is detailed guidance that replaces the OFT’s 2008 guidance on the Unfair Terms in Consumer Contracts Regulations (OFT 311).What does this change mean in practice?
What does this change mean in practice?
- With regard to disproportionately high exit fees, firms should be cautious about terms that impose large exit or cancellation fees, or that prevent consumers from obtaining full refunds of money invested or paid when withdrawing from or cancelling contracts. In any event, under current Financial Conduct Authority (FCA) rules and other regulations (e.g. the Financial Services (Distance Marketing) Regulations 2004), many financial services contracts are required to give a consumer the right to cancel (without charge) within a cooling-off period.
- Firms should assess whether terms in contracts with consumers (particularly those not already subject to the strict provisions on cancellation or withdrawal without charge (e.g. distance contracts)) are likely to be regarded as imposing disproportionately high exit fees; generally, any exit fees that are greater than the firm's reasonable costs of administering the customer's contract up to the point it is terminated or cancelled, and including those costs arising from terminating the arrangements run the risk of being considered to be disproportionately high, and therefore unfair and unenforceable.
- It is also important to ensure that the services and obligations to be performed under an agreement, and the price to be paid are clearly determined in advance, in the agreement terms, and not left unspecified or "to be determined" at some future point in time. Otherwise, for example, any charge or fee to be imposed at some future point in time, which was not clearly specified at the time the consumer was bound by the contract, may be unenforceable as an unfair term.
The FCA's oversight of unfair terms
The FCA acts alongside the CMA as an enforcer of the UTCCRs for FCA regulated firms. The FCA's powers, like the CMA, include the ability to apply for an injunction to prevent a firm relying on an unfair term.
Principle 6 of the FCA's Principle of Business requires firms authorised by the FCA to treat customers fairly. The FCA has previously made clear that compliance with the UTCCRs is a key element of this principle, and the same position will apply with respect to the obligations specified under the CRA. Note, however, that the Principle 6 applies to the entirety of a firm's dealings with a client, whereas compliance with the UTCCRs/CRA is focused on the contractual obligations of each party to an agreement (although with the broader scope noted above in respect of other documents and notices).
In March 2015 the FCA withdrew most of its unfair terms guidance ahead of the implementation of the CRA as it "no longer reflects the FCA's view on unfair contract terms." It is expected that this guidance will be updated and replaced in due course, however the FCA have not stated any timetable for this happening. It is to be hoped that the new guidance will be issued very soon, so that financial services firms can begin to take account of the FCA's proposed approach under the CRA unfair terms provisions in updating their customer documentation and processes in advance of the October 2015 implementation date.
Exempt from one, but not exempt from all
While the CRA seeks to consolidate some consumer protection legislation, it does not cover every area of consumer protection law . Other legal and regulatory requirements and protections (e.g. the Financial Services (Distance Marketing) Regulations 2004 or under FCA rules, as noted above) will therefore continue to apply to many financial services consumer contracts.
Exemption from, or generally falling outside the scope of other consumer protection legislation or regulatory requirements does not necessarily mean that a contract will fall outside the scope of the CRA unfair terms protections. In particular, credit agreements that are exempt under the Consumer Credit Act 1974 (CCA) (e.g. those where a high net worth borrower has made a declaration to that effect) and which therefore lose most of the protections under that legislation, will usually remain within the scope of the CRA regime so that the terms of those exempt credit agreements will generally still be susceptible to a fairness assessment, even though they are exempt agreements under the CCA.
Compliant with one, but not compliant with all
Similarly, while there is overlap between the new CRA regime and other consumer protection regimes such as the CCA, so that in some instances the same legal assessment or conclusion will apply, the same term may be enforceable under one regime but unenforceable under another.
For example, a term of a credit agreement that is communicated in the correct document, in the correct format and at the correct time will generally be compliant with the CCA and the regulations made under that Act (and leaving aside considerations under the FCA CONC rules) and therefore enforceable, but if, for example, that same term imposed disproportionately high exit fees, it would likely be considered unfair and therefore unenforceable under the CRA, notwithstanding that the agreement and format in which it was documented was fully compliant with the CCA provisions.
It is therefore important to consider customer agreements holistically, including the types of customer to whom the product or service governed by the agreement is targeted, the way in which the product or service will be marketed and sold, and how the service will be performed generally. The agreement terms will then need to be considered against this holistic assessment with the aim of ensuring that they would survive a fairness assessment under the CRA regime described above, whilst also complying with other applicable laws and regulations.
The law is stated as at 5 June 2015.