ENF 20
Unfair terms in consumer contracts
ENF 20.1
Application and purpose
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ENF 20.1.1
See Notes
This chapter
explains the FSA's policy
on how it will use its powers under the Unfair
Terms Regulations.
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ENF 20.1.2
See Notes
The FSA has
agreed with the Office of Fair Trading that the FSA will consider the fairness within the
meaning of the Unfair
Terms Regulation of financial services contracts for carrying
on:
(1) any regulated
activity;
(2) general insurance, including broking;
(3) lending, administration, advising and
arranging in respect of mortgages where the lender takes a first legal charge
over property in the United
Kingdom and the property is at least 40% occupied by the borrower
or by a member of his immediate family
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ENF 20.1.3
See Notes
The Office of Fair Trading will consider
the fairness within the meaning of the Unfair
Terms Regulations of other financial services contracts involving
carrying on activities governed by the Consumer Credit Act 1974, including
second charge mortgage loans, buy to let mortgages, and non-mortgage personal
loans (including credit cards). Further, where the firm concerned is not a firm or an appointed representative,
the Office of Fair Trading may take enforcement action under the Unfair Terms Regulations in
respect of financial services contracts involving the carrying on of activities
within ENF
20.1.2 G (see ENF
20.4.6 G (5) and (6)).
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ENF 20.1.4
See Notes
This chapter therefore applies to:
(1)
firms;
(2)
appointed
representatives; and
(3) other persons, whether or not a person with permission, who are using, or recommending
the use of contracts, for carrying on the activities set out in ENF
20.1.2 G.
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ENF 20.1.5
See Notes
This chapter uses 'firm' to refer to
all persons covered
by ENF
20.1.4 G.
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ENF 20.2
Introduction
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ENF 20.2.1
See Notes
This chapter contains guidance on the FSA's formal powers under the Unfair Terms Regulations.
This chapter does not contain comprehensive guidance on the Regulations, and the reader
should refer to the Regulations themselves for further details.
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ENF 20.2.2
See Notes
This chapter also gives guidance on the approach
the FSA expects
to take before considering whether to exercise its formal powers under the Unfair Terms Regulations.
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ENF 20.2.3
See Notes
The FSA has
powers as a qualifying body under the Unfair
Terms Regulations. The Regulations are not made under the Act.
However, the Regulations say that the FSA's functions
under the Regulations are treated as functions under the Act. This:
(1) makes the regulatory objectives relevant to the formulation
of policy governing the discharge of the FSA's functions
under the Regulations;
(2) means that any complaints about the FSA's activities under
the Regulations can be referred to the Complaints
Commissioner;
(3) allows the FSA to make full use of its information disclosure
powers;
(5) protects the FSA against liability in damages in respect
of its activities under the Regulations; and
(6) allows the FSA to raise fees to fund its activities
under the Regulations.
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ENF 20.2.4
See Notes
The FSA will
publish on its Internet site details of cases that result, through either
an undertaking by a firm or injunction obtained from the courts, in a change
in the contract terms used by it. The name of the firm will be included. Additionally,
the Office of Fair Trading publishes similar details of cases that it and
other qualifying bodies have dealt with in accordance with their duties under
regulation 15 of the Unfair
Terms Regulations. The FSA may
therefore pass such details of cases to the Office of Fair Trading for publication
on the Office of Fair Trading Internet site.
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ENF 20.3
The Unfair Terms Regulations
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Terms to which the Unfair Terms Regulations Apply
ENF 20.3.1
See Notes
(1) The Unfair
Terms Regulations apply, with certain exceptions, to terms in
contracts concluded between a seller or supplier and a consumer which have not been individually
negotiated.
(2) Terms cannot be reviewed for fairness
within the meaning of the Unfair
Terms Regulations if they are terms which reflect:
(a) mandatory statutory or regulatory provisions;
or
(b) the provisions or principles of international
conventions to which the EEA
States or the European Community as a whole are party.
(3) Terms which are written in plain, intelligible
language also cannot be reviewed for fairness within the meaning of the Regulations
if they relate to the main subject matter of the contract or the adequacy
of the price or remuneration, as against the goods or services supplied in
exchange. However, the FSA can
review terms concerning these matters for fairness within the meaning of the
Regulations if they are not written in plain, intelligible language. The FSA does not consider
that it is enough that a lawyer could understand the term for the term to
be excluded from review for fairness within the meaning of the Regulations.
The term must be plain and intelligible to the consumer.
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When is a term "unfair" within the meaning of the Regulations?
ENF 20.3.2
See Notes
Terms to which the Unfair Terms Regulations apply are regarded
as unfair if, contrary to the requirement of good faith, they cause a significant
imbalance in the parties rights and obligations to the detriment of the consumer.
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The main powers of the courts and qualifying bodies under the Regulations
ENF 20.3.3
See Notes
(1) Regulation 12 of the Unfair Terms Regulations states that: '(1) The [Office
of Fair Trading] or [...] any qualifying body may apply for an injunction
(including an interim injunction) against any person appearing to them to
be using, or recommending the use of an unfair term drawn up for general use
in contracts concluded with consumers'.'(3) The court, on an application under this regulation, may grant
an injunction on such terms as it thinks fit.'
(2) The FSA is
a qualifying body for the purposes of regulation 12.
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ENF 20.3.4
See Notes
(1) In deciding whether to grant an injunction, the court
will decide whether the term in question is unfair within the meaning of the Unfair Terms Regulations (see ENF
20.3.2 G).
(2) If the court were to grant an injunction, the seller
or supplier or recommender would have to stop including the unfair term in
contracts it concluded with consumers from
the date of the injunction
(3) If the seller or supplier or recommender
fails to comply with the injunction,
it will be in contempt of court
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ENF 20.3.5
See Notes
The FSA also
has the power under regulation 13 of the Unfair
Terms Regulations to require for certain purposes that the seller
or supplier or recommender supply the FSA with
certain information or documents relating to pre-formulated standard contracts.
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ENF 20.3.6
See Notes
If the court finds that the term in question
is unfair, the seller or supplier or recommender would also have to stop relying
on the unfair term in existing contracts governed by the Unfair Terms Regulations. This is because
regulation 8 of the Regulations provides that an unfair term is not binding
on the consumer.
To the extent that it is possible, the existing contracts would continue in
effect without the unfair term.
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ENF 20.4
The Unfair Terms Regulations: the FSA's role and policy
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ENF 20.4.1
See Notes
The FSA may
consider the fairness of a contract within the meaning of the Unfair Terms Regulations following
a complaint from a consumer or
other person or on its own initiative if the contract is within its scope
according to ENF
20.1.2 G.
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ENF 20.4.2
See Notes
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ENF 20.4.3
See Notes
(1) The principal way in which the FSA would act on its own
initiative is to undertake a review of contracts in a particular area of business
on its own initiative. This might involve investigating the contract terms
used by several firms in a particular sector, rather than waiting for complaints
regarding a particular firm.
(2) The FSA will,
for example, consider launching such a review if multiple consumer contract complaints or other intelligence
lead it to believe that under the Unfair
Terms Regulations there may be a contractual issue of wider
significance to firms and consumers.
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ENF 20.4.4
See Notes
If, following either a complaint or an
own-initiative review, the FSA considers
that a term in a contract which is within its scope as described in ENF
20.1.2 G is unfair within the
meaning of the Unfair
Terms Regulations, it may challenge firms regarding their use
of the term, as described in ENF
20.4.6 G.
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Interaction with the FSA's powers under the Act
ENF 20.4.5
See Notes
(1) The FSA will
consider using its functions under the Unfair
Terms Regulations in the context of its wider regulatory powers
under the Act.
(2) In some cases, it might be appropriate
to use other powers to deal with issues identified under the Unfair Terms Regulations.
The powers available to the FSA under
the Act may
vary depending on the regulated
activities, if any, which the firm carries on (see ENF
20.1.2 G). For example, the use
of the unfair term might involve a breach of a rule in COB, and, if so, it would also be open to
the FSA to
address the issue as a rule breach.
(3) The FSA may,
in some circumstances, consider treating the matter under its powers in the Act and under the Unfair Terms Regulations.
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FSA policy on obtaining injunctions
ENF 20.4.6
See Notes
(1) If the FSA decides to address issues using its powers
under the Unfair Terms
Regulations, and the contract is within its scope as described
in ENF
20.1.2 G, it will, unless the
case is urgent, generally first write to a firm expressing its concerns about
the potential unfairness within the meaning of the Unfair Terms Regulations of a term or terms
in its contract and inviting the firm's comments on those concerns. If the FSA remains of the view
that the term is unfair within the meaning of the Unfair Terms Regulations, it will normally
ask the firm to undertake to stop including the term in new contracts and
stop relying on it in contracts which have been concluded.
(2) If the firm either declines to give an
undertaking described in (1), or gives such an undertaking and fails to follow
it, the FSA will
consider the need to apply to court for an injunction under regulation 12 of the Unfair Terms Regulations,
described in ENF
20.3.3 G.
(3) In determining whether to seek an injunction against a firm,
the FSA will
consider the full circumstances of each case. A number of factors may be relevant
for this purpose. The following list is not exhaustive; not all of the factors
may be relevant in a particular case, and there may be other factors that
are relevant:
(a) whether the FSA is satisfied that the contract term which
is the subject of the complaint may properly be regarded as unfair within
the meaning of the Unfair
Terms Regulations;
(b) the extent and nature of the detriment
to consumers resulting
from the term or the potential detriment which could result from the term;
(c) whether the firm has fully cooperated
with the FSA in
resolving the FSA's concerns
about the fairness of the particular contract term;
(d) the likelihood of success of an application
for an injunction;
(e) the costs the FSA would incur in applying for and enforcing
an injunction and
the benefits that would result from that action; the FSA is more likely to be satisfied that an
application is appropriate where an injunction would
not only prevent the continued use of the particular contract term, but would
also be likely to prevent the use or continued use of similar terms, or terms
having the same effect, used or recommended by other firms concluding contracts
with consumers.
(4) In an urgent case, the FSA may seek a temporary injunction, to prevent the continued use
of the term until the fairness of the term could be fully considered by the
court. An urgent case is one in which the FSA considers that the actual or potential
detriment is so serious that urgent action is necessary. In deciding whether
to apply for a temporary injunction,
the FSA may
take into account a number of factors, including one or more of the factors
set out in (3). In such an urgent case, the FSA may seek a temporary injunction without consulting with the firm
in the manner described in (1).
(5) When the FSA considers that a case requires enforcement
action under the Unfair
Terms Regulations, it will take the enforcement action itself
if the firm is
a firm or an appointed
representative.
(6) Where the firm is not a firm or an appointed representative (see ENF
20.1.4 G(3)), the FSA will pass the case
to the Office of Fair Trading, with a recommendation that it take the enforcement
action. The Office of Fair Trading may then decide whether or not to take
enforcement action.
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ENF 20.5
Risk Management
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ENF 20.5.1
See Notes
(1) Where a firm has given an undertaking
as described in ENF
20.4.6 G (1),
or a court has ruled the firm's term unfair, then the FSA considers it desirable that the firm
should notify promptly clients with whom it has already concluded contracts
of the effect on their contracts.
(2) The firm should also, as part of its
risk management, consider the effect on its own business, including whether
there are relevant risks requiring mitigation. This may involve the firm contacting
existing customers in due course to request that they agree to an amended
contract, though such amendments will themselves need to avoid unfairness
within the meaning of the Unfair
Terms Regulations and comply with the law of contract generally.
(3) As part of their risk management, firms
that have not themselves given an undertaking or been subject to a court decision
should remain alert to undertakings or court decisions concerning other firms,
since these will be of potential value in indicating the likely attitude of
the courts, the FSA,
the Office of Fair Trading or other qualifying bodies to similar terms or
terms with similar effects.
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ENF 20.6
Redress
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ENF 20.6.1
See Notes
(1) The FSA does
not have the power under the Unfair
Terms Regulations to grant redress to consumers who have suffered loss as a result
of an unfair term. Consumers may
choose to complain to the firm and to seek redress from it. If the firm does
not satisfy the consumer's complaint,
the consumer may
choose to refer the complaint to the Financial
Ombudsman Service, if appropriate.
(2) If the use of an unfair term also amounts
to a rule breach
(see ENF
20.4.5 G (2)) and that breach
causes loss to consumers,
the FSA can
apply to court for restitution or require restitution. The FSA will consider whether to use these powers
in accordance with the policy in ENF 9 (Restitution and redress).
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