Treating Customers Fairly
The Financial Services Authority (“FSA”) is continuing its programme of work to ensure firms comply with principle 6 of the FSA’s Principles for Businesses by treating customers fairly in all aspects of their business. This work, which has been one of the FSA’s key priorities for a few years, is known as the FSA’s Treating Customers Fairly initiative (or “TCF” for short). Although TCF is soon to become part of the FSA’s core supervisory work, and attention is now focusing on the implementation of the Retail Distribution Review, the FSA has confirmed that TCF remains a very high priority within their Retail Strategy.
In June 2008, the FSA published a report which outlined the results of its review of firms’ awareness of, and compliance with, the Unfair Terms in Consumer Contracts Regulations 1999 (“UTCCR”) viewing it as an integral part of TCF. It reminded firms in December 2008 that it expected all firms to have fair terms in their standard contracts with consumers, thereby complying with the requirements of the UTCCR and the TCF principle. The FSA believes that unfair contract terms are a strong, and very visible, indicator of a failure by a firm to treat its customers fairly.
In January 2009, the FSA Manager of the Unfair Contract Terms Team gave a speech entitled the “FSA’s interpretation of the UTCCR” which provides useful insight into the FSA’s approach to unfair terms (and their inter-relationship with TCF), enforcing the UTCCR and what firms should be doing to help ensure that they comply.
What do the UTCCR say?
The UTCCR apply across diverse business areas, including financial services, and make unfair terms unenforceable against the consumer. They are written in general terms and they are enforced by the FSA in respect of FSA regulated businesses (and by the Office of Fair Trading in respect of other areas) but their interpretation is a matter for the Courts.
The key test to determine whether a contract term is fair or not is set out in UTCCR Regulation 5(1) and provides that "a contractual term which has not been individually negotiated shall be regarded as 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 FSA’s approach to Unfair Terms
Regulation 5 is always the FSA’s starting point and when applying the fairness test, they consider the overall fairness of the particular term in the context of the contract as a whole The FSA noted that fairness is a wide concept and, like its principles-based regulation, is not a matter of rigid requirements: it can be helpful, when considering whether a term gives rise to a 'significant imbalance in the parties' rights and obligations', to take a step back and consider whether each party to the contract would have thought the term fair from the other’s perspective at the time the contract was formed between them.
The FSA also referred to the comments of the judge in DGFT v First National Bank that “good faith” is “one of open and fair dealing“ and that openness requires terms to be expressed “fully, clearly and legibly, containing no concealed pitfalls or traps”. The judge explained that fair dealing requires that “firms should not, deliberately or unconsciously, take advantage of consumers, whether because of their lack of experience, unfamiliarity with the subject matter of the contract, weak bargaining position or a number of other factors”.
The FSA consider that detriment may be actual detriment or potential detriment - so, in other words, even if an unfair term is not being applied unfairly in practice it will still consider if there is the potential for consumer detriment in the event that the term was to be applied unfairly.
Linked to all of this is the requirement under UTCCR Regulation 7(2) that a firm "shall ensure that any written term of a contract is expressed in plain, intelligible language." And that if there is any doubt as to its meaning, it will be interpreted in the way most favourable to the consumer – and therefore it is clearly in firms’ interests to ensure that their contract terms are clear and unambiguous.
The FSA referred to two recent examples. In 2008 it published a statement advising firms that the use of language such as 'consequential loss' in their consumer contracts was not, in their view, plain and intelligible and that terms using this kind of language may be unfair – and a firm involved undertook to stop using the phrase in its contracts. This message was reinforced in another undertaking obtained from a firm not to use the word 'indemnify' in its consumer contract as, among other concerns, the FSA did not believe that the average consumer would understand the implications of a term whereby he agrees to 'indemnify' a firm.
More information to assist regulated firms in interpreting and applying the UTCCR is contained in the FSA’s Statement of Good Practice on the 'Fairness of Terms in Consumer Contracts' published in May 2005.
What questions should a firm be asking itself?
Therefore in reviewing its existing terms or drafting new terms a firm should consider the following questions?
- Would each party to the contract have thought the term fair from the other’s perspective?
- Is the term fair in the context of the contract as a whole?
- Is the firm dealing “openly and fairly” with its customers?
- Does the term give rise to a potential detriment to the consumer?
- Is the term drafted in clear and unambiguous language?
Overlap between TCF and Unfair Terms
The FSA described the overlap between the UTCCR and TCF as follows:
“The Regulations apply to terms in a standard-form contract but the Principles apply to the way that those terms are applied in practice, not just the way they are drafted. So a firm must not use an unfair term (or a fair term) unfairly in practice. Also the Principles apply to the ‘core terms’ of a contract. These are the terms which set the price or describe the main subject matter of the contract and they are generally not reviewable for fairness under the Regulations, provided they are written in plain, intelligible language.”
The FSA’s approach to enforcement
How the FSA enforce's its powers under the UTCCR is set out in the Unfair Contract Terms Regulatory Guide (UNFCOG). Where the FSA identifies a term that is unfair it will contact the firm and seek the firm's views. If the FSA remains convinced of the unfairness of the term it will ask the firm for an undertaking to amend or delete the term. If merited, and if no undertaking is given, it will take enforcement action through the courts. Similar action may follow if a firm breaches an undertaking it has given to the FSA. Where an undertaking is given, it will be published on both the FSA website and the OFT's. The FSA generally expects a firm to notify its consumers of any change it has undertaken to make.
Where the FSA receives a number of complaints about the same issue, it may undertake a wider review of contracts to identify whether there is a wider industry problem with a particular term, as it did in the case of mortgage exit administrations fees.
What should firms be doing?
The FSA also provided the following checklist of questions for legal and compliance advisers to help them assist senior management in discharging firms’ responsibilities under UTCCR:
- Are there robust systems and controls in place to ensure your consumer contracts are fair?
- Are the people who actually draft your contracts adequately skilled?
- Does someone with the appropriate expertise and experience sign-off the newly-drafted contracts?
- Is the information in the contract and its presentation appropriate for the target audience?
- Is the content clear, fair and not misleading?
- Are there adequate systems in place to check that your contracts reflect legal and regulatory developments?
- Are there adequate systems and controls in place to ensure that terms are fairly applied?
- Does your senior management receive and use appropriate management information to measure the effectiveness of your systems and controls for contracts?
We have taken care to ensure the accuracy of this publication. However, the publication is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
