In March 2015, the FCA withdrew its 2012 guidance on ensuring fairness of terms in consumer contracts. It also withdrew all of the published undertakings which followed the 2012 guidance. The reason it gave was that the guidance "no longer reflected the FCA's view on unfair contract terms".
It is certainly true that a line of decisions at the Court of Justice of the European Union had moved radically away from the FCA's fairly formulaic approach, but this sudden lack of any guidance at all left firms in limbo. Whilst the Competition Market Authority (CMA) published guidance later in 2015, this did not address the financial services industry's concerns: were their variation clauses now unfair and unenforceable? Did they have the power to vary their variation clauses, let alone the other provisions in their customer contracts? Could portfolio buyers amend their terms to be consistent with their own products and to work on their systems? Was there an increased risk of enforcement action (or worse, remediation)? Since 2015, firms have lived with a great deal of uncertainty, some taking uncomfortable risk decisions in order to keep pace with change.
Now, at last, 3 years later, the FCA has published draft new guidance on fairness of variation clauses in consumer contracts for financial services. We look at the areas where the guidance has provided clarity for the industry and what the proposed guidance might mean for firms.
The all-important drafting
It goes without saying that a clause will not be fair if it grants to the firm an unreasonably wide discretion to vary the contract. What the industry has not been clear on since 2015 is where 'reasonable' discretion ends and 'unreasonable' discretion begins. Some of the pointers given by the FCA in this context are well-established:
- reasonable notice must be given, taking into account how long consumers need to shop around and find an alternative;
- personal notice is better;
- exit charges should be avoided; and
- reasons are more likely to be valid if they are outside the firm's control.
In addition, new guidance in the context of long-term contracts has been provided:
- the clause should explain both when a change may be required and what the change might be;
- reasons for varying a contract should be clear and should not overlap;
- firms should not pass on risks and costs that the consumer would reasonably expect the firm to bear;
- changes in technology and systems; changes in regulation, legislation or court or FOS decisions; and changes to the cost of funding are all likely to be valid reasons;
- to remain competitive is unlikely to be a valid reason, unless the clause states, for example: "provided the variation operates in the customer's favour";
- an indication that the list of reasons is not exhaustive and/or that the terms may be varied for 'any other valid reason' may well be acceptable if the contract has no end date, provided it is used in the right way, but it will not be a valid reason in an agreement with a fixed term; and
- website FAQs and pre-contractual explanations regarding how and why the interest rate or other terms might change can help a firm meet the necessary standard of transparency.
The FCA's enforcement approach
The CMA guidance makes it clear that a clause can be found to be unfair even if it has not been and is not being used in a way that causes consumer detriment in practice. The FCA reiterates this, but also confirms that when deciding whether to take enforcement action, it will look at:
- the fairness of a term under the Consumer Rights Act 2015;
- whether the term has operated fairly; and
- the wider circumstances applying to the sector as a whole (including the impact of external events such as the financial crisis) and whether a consumer has suffered any harm relative to other consumers in that sector. By way of example, the FCA points to the impact that changes to the cost of funds and other economic factors had on pricing in 2007-8.
This broader view is certainly reassuring from a regulatory risk perspective. One might also say that, while the legal risk associated with a clause that is technically unfair but which is not used in an unfair way is not mitigated, that legal risk – of a consumer taking a challenge to the courts when he or she has suffered no harm – would appear to be small.
However, there is a residual risk for firms and that arises where they have made changes that result in cost increases to customers in order to remain competitive. A non-risk based portfolio reprice, or the introduction of an annual fee to a current account product, may be needed as business models and margins change. It is in these situations that complaints to the Financial Ombudsman Service (FOS) may start to be seen, with complainants arguing that a variation clause is unfair, that the consumer has suffered harm and that compensation should be paid.
With claims management companies looking to maintain income as PPI complaint numbers come down, this is a risk that should not be ignored. In response, firms will need to be ready with counter-arguments that point to the usefulness of the product to the customer and how he or she has not suffered harm relative to other consumers with similar products.
On a go forwards basis, firms should be extra careful as to who they select for repricing and should ensure that any change is implemented with the utmost transparency and rigour to mitigate risk in this area.
Given the well-established case law, cited at length in the FCA's draft guidance, it is, we think, unlikely that the draft guidance will change much as a result of the consultation, which closes on 7 September 2018. If that is right, then many firms may well find that their variation clauses contain elements that are open to challenge, particularly where they contain a power to vary 'in order to remain competitive and ensure an appropriate return'.
Once there is clear published guidance from the FCA, firms will need to consider whether to change such clauses and, if they do, how they can still have the flexibility in the product that they need. For contracts with no end date, such as current account and credit card terms, it may be a question of going back to the use of 'any other valid reason' wording, or something similar. For fixed term contracts, firms may wish to place more emphasis on website FAQs and tips, to increase transparency and customer awareness (although the FCA's suggestion that firms publish their pricing policies on the internet seems a step too far).
In the meantime, firms should ensure that they have allocated responsibility for ensuring that consumer contracts are fair and transparent to someone in a suitable role. That person should be overseeing the following kinds of activities:
- frequent contract and product documentation reviews for fairness;
- reviews following complaints, cancellations or evidence that terms may be unfair;
- monitoring FCA and CMA guidance and guidance from trade associations;
- reviewing management information to identify concerns; and
- improving staff training.