On 12 July 2017 the Financial Conduct Authority (FCA) published its first undertaking in relation to fairness of terms under Part 2 of the Consumer Rights Act 2015 (CRA). This is the first time in more than two years that the FCA has published its views on fairness of terms in consumer contracts.
The FCA and unfair terms – a quick history
Once upon a time, the FCA was visibly active in policing the fairness of terms in contracts between regulated firms and consumers. Undertakings made under the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR) were published routinely and there was plenty of reference material and guidance made available by the FCA as to how to ensure that terms met the standard expected.
All that changed in March 2015, when the FCA suddenly withdrew all of its guidance relating to fairness of terms, removed certain undertakings from its website and appeared to stop seeking and publishing undertakings from regulated firms. Why? Initially the FCA said that its previous guidance no longer reflected its views and that it was considering how its guidance should be updated in the light of:
- the implementation of the CRA (which replaced the UTCCR) in October 2015;
- new guidance from the Competition and Markets Authority (CMA) on fairness of terms; and
- case law of the Court of Justice of the European Union (CJEU) on fairness of terms.
A year or so later, however, the FCA confirmed that it had no intention of publishing further guidance on unfair contract terms at all. Instead, it directed firms to the CMA’s guidance directed at all business-to-consumer sectors, and suggested that firms may also want to seek their own legal advice.
When it comes to firms carrying on regulated activity, it remains the FCA’s responsibility to consider the fairness of terms under consumer contracts, but any policing they do now is behind closed doors – hence the surprise from some that an undertaking has suddenly been published.
Why did the FCA change its approach to policing unfair terms?
This all goes back to the interpretation of Articles 4 and 5 in the EC Directive of 1993 on unfair terms in consumer contracts (1993 Directive) (implemented in the UK previously by the UTCCR and now by the CRA). Those Articles say not only that all terms in a consumer contracts must be drafted in plain and intelligible language, but also that provided any core terms are drafted in plain and intelligible language (i.e. terms which define the subject matter of the contract), they will not be open to challenge under the Directive.
In a series of decisions handed down by the CJEU since 2012, what is meant by “plain and intelligible language” has somewhat taken on a life of its own. The CJEU has decided that for a clause to be plain and intelligible, it must achieve a level of transparency that ensures that, pre-contract, the consumer can see, on the basis of clear, intelligible criteria, the economic consequences that derive from the relevant clause.
When you translate that interpretation into the financial services field, you soon run into problems. For example, a consumer might have a current account or credit card for tens of years, so it is common practice for a provider to reserve the right not just to change its pricing levels in the future but also to change the way that it prices altogether – not least because it may want to reflect new ways in which customers are using the product. Another example is where portfolios of consumer accounts such as mortgages and credit cards change hands, whether through sales or because of institutional consolidations. As those portfolios move onto new systems, terms and conditions and pricing will often need to change simply so that they can continue to be serviced. Applying the CJEU’s vision of transparency, it is hard to see in either of those examples how a variation clause can be drafted now, in 2017, that explains to new customers the economic consequences of an unspecified change to the way the product is run or priced 10 or 20 years from now.
Herein lies the problem for the FCA. While it is still expected to police the fairness of terms in the regulated financial services sector, it is highly improbable that it would ever be able to draft blanket guidance that gives sufficient certainty for firms on how to achieve the levels of transparency that the CJEU decisions indicate is required. Instead it has left it to firms to take risk-based advice individually on each set of terms and conditions when they are drafted or varied.
The same applies to the FCA’s previous practice of regularly publishing undertakings from firms: whilst it can tell a firm that its clause is in danger of breaching the CRA, an undertaking by definition articulates how the firm is to put its house in order. If the FCA can no longer give guidance on how to be compliant, it will not be able to seek an undertaking.
A further factor may be that, under Article 6 of the 1993 Directive, when a term in a contract is found to be unfair and unenforceable, the remainder of the contract is to continue without the offending term, if it is capable of doing so. In the CJEU’s view, this means that domestic courts are not authorised to revise the content of unfair contractual terms. The CJEU has made it clear that, in its view, giving domestic courts the ability to revise unfair clauses would weaken the dissuasive effect of Article 6 on sellers or suppliers.
By its very nature, an FCA undertaking tends to set out how a firm is going to revise its unfair clause. By doing so, it tacitly approves those revisions, thereby doing exactly what the CJEU has said domestic courts (and, presumably by extension, regulators) should not do.
So does this sudden publication of an undertaking herald a new chapter in the FCA approach to unfair terms?
In our view the answer to this question is a resounding ‘no’. The undertaking is from London and General Insurance Company (LGI) which provided extended warranty protection in conjunction with a current account provided by another firm.
The policy set out a list of items that were covered, preceded by the wording “Items such as”, which suggested that the list of items were examples of items that were covered. However, other information indicated that only the items in the list were covered under the policy and, in fact, customers were being denied cover unless their item was in the list. This case, therefore, was not about wording that was not sufficiently transparent, but about wording that, combined with other disclosures and working practices, was considered to be confusing and misleading.