UK: United Kingdom: Insurance Contracts and the FSA and FOS Application Of The Unfair Terms In Consumer Contracts Regulations 1999

Last Updated: 13 February 2009
Article by Jonathan Newbold

In 2008 the FSA published a statement that it considered references to "consequential loss" in consumer insurance contracts were not "plain and intelligible" and, therefore, potentially unfair. At a glance, one might consider that the FSA's statement – based on its interpretation of the Unfair Terms in Consumer Contracts Regulations 1999 (the "Regulations") – is not relevant to professional indemnity and other commercial books of business, but that could be a mistake.

Application limited to "consumers"?

There are two principal reasons why the Regulations could reach beyond the domain of the consumer. First, the FSA has emphasised the link between fair contract terms and a firm's ability to demonstrate they are treating their customers fairly. Because it is difficult to isolate TCF to consumer products without making it extremely difficult to demonstrate that TCF is embedded in your culture, firms often adopt TCF Principles across consumer and non-consumer books of business.

The second reason is that if your customers who fell within the FOS small business jurisdiction complained about the fairness of a particular term, FOS would not be constrained by the fact that the Unfair Terms in Consumer Contracts Regulations 1999 only apply to persons who are not acting in the course of their trade or profession due to the Ombudsman's "fair and reasonable" remit.

Expansion of the FOS small business jurisdiction

Before moving on to how the FSA and FOS would be likely to determine whether a contract terms was fair or not, it is important to note that the current FOS small business jurisdiction is set to increase in November 2009. Currently, small businesses with a turnover of no more than £1,000,000 are entitled to refer complaints to FOS. However, the FSA is planning to increase the turnover threshold so that businesses with a turnover of up to €2,000,000 (approximately £1.8 million) and fewer than 10 employees will be covered. Based upon current exchange rates, this proposed change will almost double the current turnover threshold and will greatly increase the number of businesses who will have the benefit of access to FOS. This development clearly has wider implications than merely the fairness of contract terms.

The FSA's approach

Turning back to how the FSA and to a slightly more limited extent the Ombudsman will consider whether or not a contract term is fair, regard is likely to be had to Regulation 5(1) which states as follows:

"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 has emphasised the link between this regulation and FSA Principle 6, which provides that a firm must pay due regard to the interests of its customers and treat them fairly.

The next consideration is likely to be based upon Regulation 7(1) which provides that a firm "shall ensure that any written term of a contract is expressed in plain, intelligible language."

As stated above, last year, the FSA published a statement that it did not consider use of language such as "consequential loss" satisfied this regulation. The FSA has emphasised the link between this Regulation 7 and FSA Principle 7, which provides that regulated firms' communications with clients must be clear, fair and not misleading.

Review terms to minimise risk of unenforceability

Unfair terms, or potentially unfair terms, are a real risk because if a term is found to be unfair by the Court, it would be unenforceable against consumers (and possibly also small businesses if the term is considered unfair by FOS).

FOS can refer potentially unfair terms to the FSA. The FSA has power to order the relevant firm to give an undertaking in relation to its revision of the unfair term, which would be published on its website, which also create a risk to reputation.

It follows that regulated firms should consider proactively reviewing its contracts with consumers and small businesses to ensure content is clear, fair and not misleading.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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