Under the Unfair Terms in Consumer Contracts Regulations 1999 (the Regulations), FSA has the power to challenge FSA-regulated firms that are using terms which they view as unfair. FSA has been particularly active of late, taking action on terms which excluded consequential loss in insurance contracts and terms which gave a mortgage lender wide discretion to demand the immediate repayment of loans.
Now, FSA has challenged a common form of customer sign-off upon which many financial services and other firms rely: it has obtained an undertaking under the Regulations from The On-Line Partnership Limited (a firm in the investment and mortgage advice business) to change a part of its terms of business.
The old term
The term said: "I confirm that I have received, read and understood this agreement and agree to the terms set out within".
FSA felt that this breached the requirements set out in Regulation 5(1) which says a term will be unfair if , "contrary to the requirement of good faith, it causes a significant imbalance in the parties' rights and obligations arising under the contract, to the detriment of the consumer".
The problem with "read and understood"
OFT published guidance last year on the use of "have read and understood" declarations. This says terms need to be clear and understandable and that consumers must be given a proper opportunity to read them. OFT's view is that a declaration of this type leads a consumer to say these conditions have been met, whether they have or not. OFT says it follows that the term would be open to serious objection. FSA has adopted the OFT's reasoning.
The new term
The firm has agreed to use a new term: "This is our standard client agreement upon which we intend to rely. For your own benefit and protection you should read these terms carefully before signing them. If you do not understand any point please ask for further information".
What firms should do
This undertaking shows FSA's increasing focus on the Regulations. For it to choose such a common term is worrying, especially as it is not obvious that consumers will get any practical benefit from the new term. Conversely, firms may benefit, as arguably the new term ultimately has the same effect, yet there is less reason for consumers to argue they did not understand it. FSA has made it clear that all firms should remain alert to undertakings or court decisions concerning others as part of their risk management. Firms that continue to use the above unfair term (or variations on it) may find themselves facing more severe FSA punishment.