FSA's interpretation of the Unfair Terms in Consumer Contracts Regulations 1999

[EXC]

http://www.fsa.gov.uk/pages/Library/.../0113_kw.shtml

[righty]

Re: FSA's interpretation of the Unfair Terms in Consumer Contracts Regulations 1999

Pity they don't practice what they preach when it comes to bank charges & their own behaviour re stay

[Shazzaw]

Re: FSA's interpretation of the Unfair Terms in Consumer Contracts Regulations 1999

EXC,

I know that this is completely off topic regards this thread but have you ANY idea on when we are going to get a decision on the Appeal????

I thought it was initially envisaged before Xmas hopefully but fairly certainly before Feb??

Thanks for any info you have which may save me hopefully checking for updates many times a day.

shazza

[natweststaffmember]

Re: FSA's interpretation of the Unfair Terms in Consumer Contracts Regulations 1999

Speech by Katherine Webster, Manager of the Unfair Contract Terms Team, FSA
CML's 7th annual legal issues for mortgage lenders conference
13 January 2009
I have spoken before to CML members about the importance of having fair terms in consumer contracts, and about the link between fair terms and firms’ ability to demonstrate that they are treating their customers fairly. But some messages are worth repeating, so before I talk to you about the work of my team and our interpretation of the Regulations, I would like to remind you of the wider context in which the Unfair Contract Terms Team operates.
The Regulatory Context

Our powers under the Regulations are just one part of the FSA’s regulatory toolkit and they are an essential and effective tool to encourage firms to treat their customers fairly and to meet our statutory objective of consumer protection.
Consumer protection is the particular focus of my team’s work as the purpose of the Regulations is to protect consumers from unfair terms in standard-form contracts. But let me reassure you that in achieving our consumer protection objective, we do not ignore other considerations – after all, our retail regulatory agenda aims to help consumers achieve a fair deal by ensuring an efficient and effective market. We know from the survey published by the Practitioner Panel in December 2008 that 61% of firms surveyed believe that the FSA has tended to focus on consumer protection to the detriment of its other objectives. However, our view is that all four statutory objectives are important.
As we have said consistently, in our view the Regulations are intended to operate in a free-market economy and do not constrain a firm from managing its business prudently. When we exercise our powers under the Regulations we do not wish to impede the legitimate commercial judgements that firms make having regard to the overall well-being of their business and all of their consumers.
The Regulations are not intended to prevent firms operating in a fair, sensible and commercial way; nor are they designed to impose an unreasonable burden on firms. Rather, their purpose is to achieve a balance between the rights and obligations of both parties to the contract and to ensure that consumers do not suffer detriment. I hope that you will agree that achieving such a balance is in the interests of both consumers and firms, and I will speak about this in more detail a little later.
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Treating Customers Fairly

As you will be aware, the FSA continues to move towards a more principles-based approach to regulation, where we rely increasingly, insofar as possible, on principles and outcome-focussed rules, rather than detailed rules prescribing how those outcomes must be achieved. Principles-based regulation is even more important and relevant in turbulent times such as these, when detailed rules would not be able to keep pace with an ever-changing financial environment.
Treating Customers Fairly is a core part of the move to more principles-based regulation, and you will all be familiar with it. We expect all firms to be able to demonstrate they are treating their customers fairly and it was very heartening that another finding from the Practitioner Panel’s survey was that the firms surveyed had an overwhelmingly positive attitude to the concept of treating customers fairly.
Contrary to some articles you may have read towards the end of last year, TCF - which has now been included within our core supervisory work - remains a very high priority within our Retail Strategy. And fair contract terms are a key and very visible factor in firms treating their customers fairly. Or, conversely, unfair contract terms - which we continue to see in contracts across the range of financial services products, including mortgages - are a strong indicator of firms' failure to embed achievement of TCF outcomes into their business operations.
We did some work last year to assess firms' awareness of and compliance with the Regulations, and the extent to which the outcome of fair terms in consumer contracts was being achieved. We published a report in June 2008 setting out our findings and giving examples of good and bad practice among firms. Mortgage contracts were among the contracts that we reviewed and, of the 20 contracts that we reviewed, 15 had at least one variation term that we considered to be unfair. I am sure that some of you here will have dealt with our correspondence on this during our follow-up work from the reviews.
We want to ensure that firms recognise fair contract terms as an important part of TCF and all of you here have a role to play in this. I will make some practical suggestions around this later, and there is a great deal of material on our Unfair Contract Terms webpages that you can review at your leisure, and that we hope will be helpful to you.
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The Regulations

Let me move on now to talk about the Regulations themselves. The Regulations apply across diverse business areas, of which financial services is but one. They are written in general terms and their interpretation is a matter for the Courts. To assist firms in interpreting and applying the Regulations, we published a Statement of Good Practice on the 'Fairness of Terms in Consumer Contracts' in May 2005. It sets out our interpretation of the Regulations in relation to contracts for products and services that are within the FSA's regulatory scope, with particular reference to variation terms, about which we receive a large number of complaints.
The Regulations implement an EC Directive - Council Directive 93/13/EEC of 5 April 1993 - and they came into force in July 1995. We gained our powers under them in 2001 although we only began regulating mortgage contracts in 2004. However, under the Regulations - and this might come as a bit of a shock to some of you (although I hope not!) - we can consider the fairness of terms in mortgage contracts from July 1995 onwards. That means that we can look at mortgage contracts that pre-date FSA regulation and that pre-date FSMA. And we do receive complaints about such contracts.
There are some limits to the mortgage contracts we can look at under the Regulations - for example, we look only at first charge mortgages. Second charge and buy-to-let mortgage contracts fall to the Office of Fair Trading (OFT), the principal enforcer of the Regulations, for consideration. We have an agreement - a Concordat - with the OFT setting out our respective responsibilities for financial services contracts under the Regulations. The Concordat is available on our website but, broadly speaking, we deal with contracts from authorised firms carrying out regulated activities and the OFT deals with all other standard-form financial services contracts.
We interpret the Regulations in accordance with the objectives of the Directive and the recitals to the Directive provide some insight into these. A reference in the recitals underlines the importance of protecting consumers from unfair contract terms and from 'one-sided standard contracts and the unfair exclusion of essential rights in contracts.' It is apparent from the recitals that we should also have regard to the bargaining strengths of the parties, any inducement which would cause the consumer to agree to a particular term and whether the firm is dealing fairly with the consumer, taking the consumer's legitimate interests into account.
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The test to determine whether a contract term is fair or not is set out in Regulation 5(1) (slide a) "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."
Regulation 5 is always our starting point and when we apply the fairness test, we consider the overall fairness of the particular term in the context of the contract as a whole. For instance, an unfair term in a mortgage contract might cause greater detriment to the consumer if he is unable to avoid the term by withdrawing from the contract because of various applicable fees and, possibly, an early redemption charge. By contrast, a similar term in, for example, a contract for an instant access savings account might cause little or no detriment as the consumer can walk away from it more easily.
Fairness is a wide concept and, like principles-based regulation, is not a matter of rigid requirements. So – and despite the fact that the title of this speech refers to the legal interpretation of the Regulations – it is sometimes not helpful to get caught up in a detailed legal analysis of what is, or is not, 'fair'. It may sound strange for me, as a lawyer, to say that, but we have found that sometimes it is 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. We find that this helps us to take a balanced approach to the issue of fairness and you might find it equally helpful if you were to adopt this, or a similar method, when drawing up, and advising on, mortgage terms.
Regulation 5 refers to the concept of good faith and, again, it can be helpful to take a rounded view of what this may mean. Good faith was dealt with in the judgment of the House of Lords in the case Director General of Fair Trading v First National Bank Plc [2001] UKHL 52 (slide b) with Lord Bingham saying that it was "not an artificial or technical concept". His Lordship explained that the requirement of good faith is one of "fair and open dealing" and that openness requires terms to be expressed "fully, clearly and legibly, containing no concealed pitfalls or traps".
(Slide c) Lord Bingham went on to say 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.
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We think that this description of fair dealing ties in very nicely with the whole concept of treating customers fairly (slide d) and I hope that this slide demonstrates the link between Regulation 5 and Principle 6 of our Principles for Businesses.
A further aspect of Regulation 5 is that the significant imbalance must be to the detriment of the consumer. Our view is that this detriment may be actual detriment or potential detriment - so, in other words, even if an unfair term is not being applied unfairly in practice we still consider if there is the potential for consumer detriment in the event that the term was to be applied unfairly. And, as a risk-based regulator, we form a view as to the extent of the actual or potential detriment and its impact on consumers.
I should also mention Schedule 2 to the Regulations which sets out an indicative, non-exhaustive list of terms which may be regarded as unfair. I should like to stress that Schedule 2 is indicative only and, whilst it can provide a useful basis upon which to consider further whether a contract term is unfair, the test of fairness is contained in Regulation 5. Also, the fact that a particular term in a contract does not offend or is not included in those listed in Schedule 2 may not, of itself, remove the risk of unfairness.
Turning now to Regulation 7(1) (slide e). It states that a firm "shall ensure that any written term of a contract is expressed in plain, intelligible language."
It might serve as a useful reminder that if a term is not drafted in plain, intelligible language and there is doubt as to its meaning, then under Regulation 7(2) it is to be interpreted in the way most favourable to the consumer. It is, therefore, undoubtedly in firms’ interests to ensure that their contract terms are clear and unambiguous.
We are still surprised by how many consumer contracts are drafted in legal jargon. Last year we published a statement advising firms that the use of language such as 'consequential loss' in their consumer contracts is not, in our view, plain and intelligible and that terms using this kind of language may be unfair. This message was reinforced in an undertaking we published from a firm agreeing to stop using the phrase 'consequential loss' in its contracts. And, towards the end of last year we also published an undertaking from a firm which agreed not to use the word 'indemnify' in its consumer contract as, among other concerns, we did not think that the average consumer would understand the implications of a term whereby he agrees to 'indemnify' a firm. How many of you are confident that your firm's consumer contracts are free of legal jargon and are in plain, intelligible language? It is worth bearing in mind that the whole purpose of Regulation 7 and the obligation on firms to use plain language is to ensure that consumers – and not just lawyers – can understand the contract and can make an informed choice as to whether to become a party to it in the first place.
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Before I move on from Regulation 7, (slide f) I hope that this slide will demonstrate its close relationship with Principle 7 of our Principles for Businesses.
Both this slide and the previous one illustrating the relationship between Regulation 5 and Principle 6 demonstrate very tangibly how firms should consider their fairness obligations in the round. There is a clear overlap between the Regulations and our Principles for Businesses. 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.
Our practice under the Regulations

Concerns about potentially unfair contract terms are referred to us from many different sources: individual consumers; consumer groups; the OFT; the Financial Ombudsman Service; Citizens Advice Bureaux; Trading Standards; and from our own FSA supervisors.
So, what happens when we receive a complaint under the Regulations? There is guidance on how we use our powers under the Regulations in a section of the FSA Handbook – the Unfair Contract Terms Regulatory Guide - that we refer to as 'UNFCOG' - and I will give you a brief overview now.
We can form a view as to whether we think a contract term is potentially unfair, but only a court can decide whether it is actually unfair. We have a statutory duty to consider every complaint that we receive, although we will not necessarily take action in every case. As a risk-based and proportionate regulator, we carry out a risk assessment to assess the level of actual or potential detriment to consumers posed by an unfair contract term. We do this to ensure that our resources are directed where they are most needed and where they will have most impact in protecting consumers.
When we do decide to take a complaint forward, we seek the firm’s co-operation. We will ask the firm to agree to delete the term, or to amend it so that it is fair. We also ask the firm to undertake to treat existing customers fairly by treating them as if the new, fairly-drafted term was in their contracts. We generally expect the firm to notify consumers of the change and we will publish the undertaking given to us by the firm on both the OFT and our own website, including details of the contract and the amendments. Publication is a requirement under the Regulations.
Yesterday we published our latest undertaking, which is from a mortgage lender. In that case the contract reserved certain powers to the lender - to withhold the mortgage, forbid any further drawdowns or demand immediate repayment of the mortgage, each in certain specified circumstances. Whilst we have no objection, per se, to lenders reserving such powers to themselves in a mortgage contract, we considered that, in this case, the ability to exercise some of the powers in some of the circumstances gave rise to a significant imbalance in the firm's power over its borrowers and was therefore unfair. For example, the lender’s power to demand immediate repayment of the mortgage could be exercised where the borrower exceeded his overdraft even by a relatively minor amount. Pursuant to the undertaking it has given us, the lender has redrafted the contract so that it may only exercise these powers where there are commensurately serious grounds for doing so.
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If we receive a number of complaints about the same issue, this may be an indication that there is a wider industry problem with that particular contract term and so we may undertake a wider review of contracts. You will recall that this is what we did when we became aware of a problem with variation terms in mortgage contracts relating to mortgage exit administration fees. The CML played an important role in highlighting our concerns with those particular terms.
If we conclude that a term in a mortgage contract is not unfair under the Regulations, that is not necessarily the end of the matter. We are mindful of firms' obligations under MCOB, as well as TCF and our Principles for Businesses – that is why I began this morning by referring to the 'regulatory context' in which we operate. So, if we believe that some aspects of a firm’s practice are unfair, even though the term complained of is not, the FSA will follow this up.
Myths

There are a number of myths which have grown up around unfair contract terms and we know this because we have regular discussions with firms about unfair terms. I think that this morning presents a very good opportunity to dispel some of these myths.
Firms say to us that, 'yes, our term might be unfair on the face of it, but it is not applied unfairly in practice and that is what matters'. We do not agree. We are always very glad to hear that firms are not trying to enforce unfair terms against consumers – but the simple fact of the matter is that unfair terms are not legally binding on consumers anyway. Regulation 8(1) makes that quite clear. And how is the consumer, who has only the term set out in black and white in the contract in front of him, supposed to know how the firm will choose to apply the term in practice? Is that ‘open and fair dealing'? We do not think so. If a contract term is drafted in a way that is unfair and does not reflect a firm’s practice, why can it not be redrafted so that it is fair and it does reflect the firm’s practice and intentions? That would be open and fair dealing with consumers.
We publish a lot of material to assist firms in meeting their requirements under the Regulations. Another myth that we have come across is that firms need only pay heed to those publications that relate to their particular business area. So, for example, you might think that you need only keep up-to-date with undertakings relating to mortgages. That is not the case. The undertakings and other materials that we publish provide a good indication as to our views on the fairness of particular terms, and also give an insight into our interpretation of the Regulations and what we consider to be fair or unfair generally – and what we believe a court might consider fair or unfair. Such indications may be applicable across a range of contracts and business areas. Not all will have direct application or relevance to mortgage contracts, but many will. For example, I referred earlier to a statement and an undertaking we published last year advising firms that the use of legalistic language such as 'consequential loss' is not, in our view, plain and intelligible. Whilst this terminology is more likely to be found in an insurance contract, publication of this statement and undertaking should have alerted firms generally to the fact that their standard-form consumer contracts should not contain technical or legal terminology. The messages contained within the statement and the undertaking are therefore equally as relevant to those of you in this audience as it would be to a gathering of lawyers from firms providing general insurance.
Similarly, the undertakings and guidance materials published by the OFT will not necessarily relate directly to mortgage contracts, but the indications they contain as to what may or may not be considered fair may be a very useful source of material for you in advising your firms about their mortgage contracts.
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A third myth is that when we consider a particular contract term to be unfair and ask for only that term to be amended or deleted, the rest of the contract must be fair. That is not necessarily the case and is a dangerous assumption. When we receive a complaint about a particular term, we consider only the fairness of that term – albeit that we consider it in the context of the contract as a whole. We are not a contract approval authority and we do not have the resources to consider every term in every contract referred to us. Even where a contract term is amended as a result of our intervention, it may still be subject to further scrutiny if we receive further complaints or other intelligence about it. As I have already indicated, we have a statutory duty to consider every complaint we receive, and this includes those that relate to terms that have already been amended.
The risks posed by unfair terms

I hope that I have successfully communicated to you how important fair contract terms are. However, if I have not, I would like to tell you about the risks posed for firms that have contracts with unfair terms.
Unfair terms pose legal risks to firms. They are, as I have already said, unenforceable against consumers.
And, it may not be prudent for a firm to rely on revenue sourced from such a term. For example, where a firm seeks to rely on an unfair term relating to the variation of charges to increase the amount it requires consumers to pay, and that term is challenged and deemed to be unenforceable, how is the loss of that anticipated revenue going to affect the firm financially? Another very recent example relates to certain terms we have seen in mortgage contracts enabling firms to impose a floor, or to determine the interest rate payable by the consumer once a certain 'trigger' in the benchmark rate is reached. Generally, we are not concerned with the fairness of an interest rate floor per se, but we do urge firms to ensure that they are drafted in a way which is balanced and fair. Furthermore – and here again the wider regulatory context I have spoken of several times this morning comes into play – we require firms to ensure that the consumer is made aware of the existence of a floor, trigger or similar feature in an appropriate manner and at both the pre-application and offer stages, in accordance with our Mortgage Conduct of Business rules.
There is also operational risk to firms in having unfair terms. Time –your time – will have to be spent drafting or approving new, fair contracts and issuing them to consumers.
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And, finally, let us not forget about the risks to reputation, perhaps especially significant in the current climate. Will consumers really want to do business with firms who, on the face of it, do not meet their legal and regulatory obligations for fair contract terms and fair treatment of their customers?
What we expect from you and what you can do to assist your firms
We think that you, as legal advisers to your firms, are ideally placed to assist senior management in discharging firms' responsibilities under the Regulations. There are a variety of ways in which you can do this:
You can try to ensure that your firms ask the right questions:

• 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?

And to assist you with this, we would suggest that you should:

• Be aware of the Regulations;
• Use all available resources to keep up to date with developments – the FSA website and the undertakings we publish; the OFT website and the undertakings it publishes; our Statements of Good Practice and our Reports on unfair contract terms issues;
• Proactively review your mortgage contracts;
• Ensure that your firms comply with any undertakings they give to us – across the range of their consumer contracts, and not just the contract to which the undertaking relates;
• Apply any indications contained in published undertakings from other firms to your own firms’ consumer contracts when you are drafting them, or advising senior management on legal risks.

Conclusion

Given that in 2008 almost 12 million households had mortgages amounting to over £1.2 trillion in lending, ensuring fair terms in mortgage contracts is an important issue for the FSA and I am sure it is an important consideration for you too, not least because of the risks I outlined earlier.
The implications of having unfair terms in mortgage contracts should be considered much more widely than simply as breaches of the Regulations. We have made it clear that we will continue to take decisive action where firms are not treating their customers fairly and we find that this results in potential or actual consumer detriment.
We have published a large amount of information to assist firms, including senior management and legal advisers, in meeting their legal and regulatory requirements for fair contracts and we encourage you to use it, and to let us know if additional information would be helpful to you.
Finally and to conclude; as we said in our May 2005 Statement of Good Practice, fairness is not contrary to the prudent management of firms - it is part of it - and I very much hope that that is the message you will all take away with you today.
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[EXC]

Re: FSA's interpretation of the Unfair Terms in Consumer Contracts Regulations 1999

EXC,

I know that this is completely off topic regards this thread but have you ANY idea on when we are going to get a decision on the Appeal????

I thought it was initially envisaged before Xmas hopefully but fairly certainly before Feb??

Thanks for any info you have which may save me hopefully checking for updates many times a day.

shazza

I spoke to the clerk to one of the judges in December and he expected judgment to be ''before the end of January''.

[ROBSTER]

Re: FSA's interpretation of the Unfair Terms in Consumer Contracts Regulations 1999

Re whats happening in the land of OFT test case?

FSA Waiver to banks ends on 26 January.

Government announcement on 2nd wave of help to the banking industry due within 2 weeks.

Still waiting on Judge Andrew Smith's pronouncement on NatWest's charges NOT being able to be tested as a penalty. Which he hoped to make before Christmas!

No individual of the above would be that significant but taken together I'm looking forward to a flurry of announcements and an attempt by the banks to compromise the charges issue (with as much help as they need from Gordon) before the end of this month.

That's my opinion!

We'll see!

[pinknico]

Re: FSA's interpretation of the Unfair Terms in Consumer Contracts Regulations 1999

I so hope you are right Robster.