Assessing vulnerability: How can firms help mitigate risks of DIY SIPPs?
Why now? The FCA withdrew its previous guidance on unfair contract terms back in 2015
The FCA withdrew its previous guidance on unfair contract terms back in 2015 and 2016 and has issued draft guidance for consultation based on current legislation. The new guidance sets out the FCA’s understanding of how current laws on unfair terms operate in the context of variation terms. The Consumer Rights Act 2015 (CRA) replaced the Unfair Terms in Consumer Contracts Regs 1999 (UTCCRs). CRA covers unfair terms in consumer contracts that came into effect from 1 Oct 2016, and the UTCCRs continue to apply to consumer contracts entered into between 1 Oct 1999 and 30 Sept 2015. Both CRA and UTCCRs implement EU legislation Council Directive 93/13/EEC on unfair contract terms. The new guidance will apply to CRAs only, but should also be considered for earlier contracts under UTCCRs. The Court of Justice of the EU has issued a series of rulings which relate to the fairness of variation terms. While these don’t all relate to financial services, the FCA has included these principles in the guidance. An unfair variation is not binding on the consumer.
The FCA is concerned about unfairness in contract statements used to permit firms to unilaterally vary the terms. Examples include the unilateral change of interest rates or fees and charges. However, the regulator acknowledges the benefit of flexibility these terms offer to firms and consumers and that such terms can be deemed fair if drafted appropriately and are in line with FCA guidance.
The consultation closes on 7th September 2018 and Finalised Guidance is expected to be published in December 2018.
What is ‘fairness’?
Terms are unfair if, contrary to the requirement of good faith, they cause a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer.
The CRA includes an indicative, non-exhaustive list of terms that will be regarded as unfair, known as the ‘grey list’. Unilateral variation terms appear in the ‘grey list’. The list is subject to ‘qualifications’ for specific terms in specific contracts, including financial services contracts. However, this is only ‘indicative’ of unfairness. A term may be on the list, but still deemed fair by the courts. Similarly, just because a term is not on the list, or is within the ‘qualifications’ does not mean it is fair. It will be necessary to look at each contract and term on a case-by-case basis to determine its fairness.
Under CRA, contract terms must be fair and transparent. This applies to both standard form contracts and individually negotiated contracts.
In assessing fairness, the FCA will take account of the contract’s subject matter and refer to all circumstances at the time the term was agreed to, e.g. how it was advertised/presented to the consumer, accompanying material and pre-contract information etc. In assessing transparency, the FCA will consider whether the terms are written in plain, intelligible language which is legible and does not cause confusion or ambiguity.
The guidance consultation sets out a list of factors the FCA will consider when looking at the fairness of variation terms as follows:
The FCA is a regulator under the CRA and a qualifying body under the UTCCRs. It has the power to consider complaints and challenge firms on unfair contract terms in relation to consumer contracts issued by the firms it regulates and their appointed representatives. It can seek an injunction or accept undertakings in lieu to prevent firms relying on unfair term(s). In addition, the Competitions and Markets Authority can consider the fairness of terms in all consumer contracts.
Firms are expected to take the guidance into account when drafting and reviewing consumer contracts. Whether a firm has followed the guidance will be taken into consideration by the FCA in deciding whether to take action against a firm for unfair contract terms.
What should firms do now?
Firms should already be paying attention to existing FCA guidance on good and poor practice and the principles on the fair treatment of customers, as well as their legal obligations in relation to the CRA. Ahead of the FCA’s guidance being finalised, all regulated firms that have contracts in place with consumers should consider: