The Financial Services Authority's (FSA) paper,"Fairness of terms in consumer contracts: a visible factor in firms treating their customers fairly", lays bare its views regarding the terms and conditions used in firms' standard form consumer contracts. It reminds them that they have until the end of December 2008 to demonstrate that they are consistently treating customers fairly. It also points out that fair terms and conditions are a very visible factor of this.
Fairness of terms is not new. Firms will be familiar with the Unfair Terms in Consumer Contracts Regulations (the Regulations) which first came into force in 1995. However, what is interesting in the paper is the extent to which they are expected to go to achieve fair terms, as well as the indicators the FSA will use to review terms. The paper includes a list of good and poor practices observed by the FSA, which is well worth a read.
It is clear that firms are expected to have in place systems and controls that maintain an extensive, proactive and continuous process of review:-
- Extensive in terms of the breadth of materials firms are expected to consider. It covers many obvious sources such as the FSA's web site, alerts and statements of good practice. It also includes some which are less obvious, such as FSA speeches commenting on fairness and third party undertakings published on the OFT as well as the FSA web site.
- Proactive in that firms should consider the application of undertakings given by other firms if they could have an application to their own and be outward looking in their review process considering external as well as internal opinions.
- Continuous in that fairness is a moving target influenced by a myriad of factors, any one of which can alter at any one time. The annual terms review is clearly a thing of the past.
Variation terms receive special attention. The FSA clearly regards such clauses as an indicator of how terms have been reviewed. Given the extent of guidance already published, the FSA is unlikely to be very sympathetic if firms get it wrong. The paper includes a summary of the FSA's published views on variation clauses, including comment on what constitutes a valid reason for change. This summary is essential reading if you have not looked at your variation clauses recently.
Mortgage, general insurance and child trust fund contracts are also on the FSA's radar. As it points out, since these products have become subject to FSA regulation relatively recently, firms should have redrafted their terms recently – and certainly after the Regulations came into force. So, there is no reason why these contracts should contain unfair terms. Three quarters of the mortgage contracts reviewed by the FSA as part of the project behind this paper were found to have at least one variation term which the FSA considered to be unfair.