A new private members bill and a new EU directive relating to unfair contract terms in consumer contracts are both currently being debated with a view to clarifying the law relating to unfair contract terms in financial services consumer contracts.
New Private Members Bill
The Financial Services (Unfair Terms in Consumer Contracts) Bill (the "Bill"), was published on 20 October 2010. In essence, it deals with the issue of the fairness of ancillary pricing terms in contracts for the supply of personal financial services.
The Bill seeks to amend the Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083) ("Regulations") and to ensure that ancillary pricing terms in consumer contracts can be assessed for fairness and for connected purposes. The Bill also provides that in any proceedings under the Regulations, there should be a presumption that ancillary charges do not form part of the core terms of the contract (ie. those terms that define the goods and services and the price paid), unless proved otherwise.
New Consumer Rights Directive
In October 2008, the European Commission put forward a proposal for a new Consumer Rights Directive relating to all consumer contracts for the supply of goods and services, to facilitate a better functioning of the business to consumer market in the EU. It reviews a number of directives, including the Unfair Contract Terms Directive (93/13/EC). If implemented, this directive will impact on the requirements of the Regulations and, more specifically, the classification of what terms can be assessed for fairness in financial services consumer contracts. As existing EU legislation on financial services is reasonably comprehensive, the proposed directive will only cover contracts relating to financial services to the extent necessary to fill any regulatory gaps, such as the rules on unfair contract terms.
Neither the Office of Fair Trading ("OFT") or the UK government believe that the current wording of the proposed Consumer Rights Directive makes it sufficiently clear that the assessment of unfairness is intended to cover contingent and/or ancillary charges outside the core terms of the contract. The key issue of concern for the OFT is transparency and whether charges included in consumer contracts are likely to be noticed and understood by consumers when they enter into a contract. It is therefore anticipated that the UK government will propose that the directive is amended to include clear principles on contingent and ancillary charges when it is discussed in November this year. The OFT and UK government also support the position that a provision should be included in the new directive to allow ancillary charges to be assessed for unfairness where it is the consumers' view that they do not form part of the core terms.
The Regulations – Unfair Contract Terms
The "Regulations" implement EU Directive (93/13/EEC). The Regulations apply to all standard term contracts entered into since 1 July 1995 and make unfair terms unenforceable against the consumer. They apply across a broad range of industries, including the financial services sector.
The Regulations seek to protect consumers from unfair standard terms contained in commercial contracts that seek to reduce or restrict their statutory or common law rights and terms which seek to impose unfair burdens on the consumer over and above the obligations of ordinary rules of law.
Article 5(1) of the Regulations sets out a test for assessing the fairness of a contract term and provides that "a contract 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."
'Good faith' means that financial service providers must deal fairly and openly with consumers. Standard terms may be drafted to protect commercial needs but they must also take account of the interests and rights of consumers by going no further than is necessary to protect those legitimate commercial interests. The bargaining strengths of the parties and any inducement which would cause the consumer to agree a particular term are often considered when deciding if a term is unfair.
Schedule 2 of the Regulations provides an indicative and non-exhaustive list of terms which may be regarded as unfair. These include for example;
- excluding or limiting the legal liability of a seller or supplier in the event of the death of a consumer or personal injury to the latter resulting from an act or omission of that seller or supplier.
- permitting the seller or supplier to retain sums paid by the consumer where the latter decides not to conclude or perform the contract, without providing for the consumer to receive compensation of an equivalent amount from the seller or supplier where the latter is the party cancelling the contract.
- irrevocably binding the consumer to terms with which he had no real opportunity of becoming acquainted before the conclusion of the contract.
- giving the seller or supplier the right to determine whether the goods or services supplied are in conformity with the contract, or giving him the exclusive right to interpret any term of the contract.
The following contract terms are not covered by the Regulations and are not deemed to be unfair:
- The "core terms" of the contract – usually those terms that define the goods or services being supplied and fix the price.
- Terms contained in contracts between businesses, private individuals and other non-consumer contracts.
- Terms that are required by law.
- Terms that have been individually negotiated.
- Terms that are contained in contracts pre-dating 1 July 1995 when the Regulations came into force.
Supervision and Enforcement in the Financial Services Sector
Unfair contract terms have long been the subject matter of disputes between the suppliers of goods and services and the consumer. Today, the Financial Services Authority ("FSA") and the OFT are responsible for the supervision and enforcement of these matters in the financial services sector.
The FSA closely monitors the way firms draft their contract terms and regulates what terms can/cannot be included in standard form contracts. The FSA expects all firms to have fair terms in their standard contracts and to have systems and controls in place to ensure the fairness of their consumer contracts. This extends to consumer contracts relating to mortgages, insurance, bank, building society and credit union savings accounts, pensions, investments and long term savings agreements.
To ensure firms understand the requirements of the Regulations and implement good practice, the FSA has published various guidelines and reports on the Regulations and good practice, for example; Statement of Good Practice on the "Fairness of Terms in Consumer Contracts" (May 2005). The FSA's guidelines and reports are available at the FSA's website www.fsa.gov.uk.
The FSA has also implemented a Treating Customer Fairly ("TCF") Principle which is designed to ensure an efficient and effective market and help consumers achieve a fair deal.
The FSA and the OFT have the power to take enforcement action through the courts against any firm that falls foul of the Regulations in order to protect consumers. How the FSA enforces its powers is explained in the FSA's Unfair Contract Terms Regulatory Guide which can be found on the FSA's website, by following this link: (http://fsahandbook.info/FSA/html/handbook/UNFCOG). The FSA and OFT regularly invoke their powers of enforcement and take action against firms where there is a potential breach of the Regulations and potential consumer harm stemming from that breach.
Developments in the Financial Services Sector
There have been numerous cases which have been submitted to the UK and EU courts to determine the issue of unfair contract terms in relation to varying issues such as the fairness of; (1) unarranged overdraft charges1; (2) estate agents imposing charges in their standard terms2; (3) terms limiting a bank's liability for damages3; and (4) terms restricting the freedom to choose a solicitor4.
Recently, there has been some confusion as to the interpretation and application of the Regulations in the UK and what terms will be considered fair or unfair despite the current legislation stating that the "fairness test" does not apply to the "core terms" of a contract.
In July 2009, the High Court of England and Wales followed the OFT's view and held that some ancillary charges imposed in the terms of an estate agent's standard contract were unfair. In particular, charges that were in small print were considered to be a "trap". These charges were not considered to form part of the core terms of the contract agreed between the parties and could therefore be assessed for fairness.2
However, in a case involving the fairness of unarranged mortgage charges, the Supreme Court held that the unfairness rules in the Regulations could not be applied to assess unarranged overdraft charges in personal current accounts. The Supreme Court decided that the relevant charges formed part of the contract price paid by customers in exchange for a package of services which made up the current account and as such were part of the core terms of the contract. Consequently, by Article 6(2)(b) of the Regulations, the OFT was unable to assess the fairness of the charges.1 This decision was contrary to the earlier decision of the High Court (see above) and has caused some uncertainty as to how UK legislation on unfair contract terms applies to charges that are "contingent" or "ancillary" to the core terms in financial services consumer contracts.
The new private members Bill will receive its second reading on 12 November 2010 in the House of Commons. The proposed consumer rights directive is currently being re-drafted and considered by the European Parliament and it is due to be voted on, on 22 November 2010. At the time of publication the outcome of both these was not known.
It is hoped that the Bill and/or the proposed consumer rights directive will clarify what terms can be assessed for fairness under the Regulations and specifically whether these will include terms relating to ancillary and/or contingent pricing terms to the core terms of financial services consumer contracts.
1. Office of Fair Trading v Abbey National plc & Others  UKSC 6
2. Office of Fair Trading v Foxtons  EWHC 1681 (Ch), 10 July 2009, (Mann J)
3. Timothy Duncan Earles v Barclays Bank plc  EWHC 2500 (Mercentile)
4. Erherd Eschig v HNIQ Sachversicherung AG (C-199/08)
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