The Consumer Rights Act came into force on 1 October 2015. As a result, consumers now have enhanced rights and firms will need to comply with a new statutory regime.
The intention of the Act is to reform and consolidate the vast majority of UK consumer law, including provisions relating to the supply of goods, the supply of services, unfair contract terms, defective digital content and enforcement powers. The changes need to be considered alongside the existing regulatory framework that additionally apply in the sector.
Whilst in no way an exhaustive list of the provisions contained in the Act, set out below are the three key areas which we believe are likely to impact the financial services sector to the greatest extent.
The effect of pre-contractual information
Businesses in the financial services sector need to be aware of the inclusion of provisions in the Act which relate to pre-contractual information provided to consumers by businesses and their agents.
Under the Act, every services contract, including those in the financial services sector, will be treated as including, as a term of the contract, anything said or written to a consumer, where: (i) it is taken into account by the consumer when deciding whether to enter into the contract; or (ii) it is taken into account by the consumer when making a decision in relation to any decision about the service, after entering into the contract.
Financial institutions will therefore need to carefully consider the extent to which communications made to consumers will incorporate additional terms into their contracts. This may require businesses to undertake a whole scale critical review of, for example, marketing materials, telephone scripts, websites and other pre-contractual documentation and processes.
Fairness of terms in financial services contracts and notices
The key change to unfair terms legislation for businesses in the financial services sector is the change in the assessment of fairness. Under current legislation, a term in a contract will not be assessed for fairness to the extent that it specifies the main subject matter of the contract, or the assessment of the appropriateness of the price payable.
However, to benefit from this exclusion, a business in the financial services sector will now be required to ensure that the term is “transparent and prominent”. A term will be considered transparent if it is in plain and intelligible language and is legible (if in writing). A term will be considered prominent if it is brought to the consumer’s attention in such a way that an average consumer would be aware of it.
This is a fundamental change, which will require businesses to review how they present and emphasise to consumers key provisions and pricing terms in contractual documentation and notices.
Statutory remedies – Service contracts
The Act introduces the following “tiered” statutory remedies in respect of services contracts with consumers:
- Tier 1 - Re-performance: a right to require a business to perform defective services again, to the extent necessary to complete its performance in conformity with the contract.
- Tier 2 - Reduction in price: a right to a “reduction in price of an appropriate amount” (i.e. the price is reduced by the difference between what consideration was paid for the service, and the value of the service actually provided).
This is the first time statutory remedies have been introduced for services and apply generically, for example, to the services of a plumber and to a life insurance policy and related services.
A consumer cannot require re-performance if it is not possible, for example, if the service was time specific. As a result, due to the very nature of many financial services contracts, it is unlikely that re-performance will be possible. A consumer is therefore likely to be able to rely upon the “tier 2” reduction in price remedy. However, it will not always be clear how this will be applied by the courts.
Please note that these statutory remedies do not prohibit a consumer from seeking other remedies for a breach of a contractual term. Such additional remedies include damages, seeking specific performance and a right to treat the contract as terminated.
What this means for financial institutions
The Act will have a significant impact on the financial services sector, alongside the specific regulatory framework. It is likely to significantly impact financial institutions which deal directly with consumers in many guises, for example, in relation to personal bank accounts, mortgages, personal loans, pensions, insurance policies, investments and ISAs. It is therefore essential that businesses in the sector fully appreciate the impact the Act will have on their business. It is clear that financial institutions will need to consider what steps are needed to ensure their business is compliant with the new provisions.