UNFCOG The Unfair Contract Terms Regulatory Guide

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UNFCOG 1

The Unfair Contract Terms Regulatory Guide

UNFCOG 1.1

Application and purpose

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UNFCOG 1.1.1

handbook-guidance
This Guide explains the FSA's policy on how it will use its powers under the Unfair Terms Regulations (the Regulations).
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UNFCOG 1.1.2

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We have agreed with the Office of Fair Trading ('OFT') that the FSA will consider the fairness (within the meaning of the Regulations) of financial services contracts for carrying on any regulated activity.
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UNFCOG 1.1.3

handbook-guidance
The OFT will consider the fairness of other financial services contracts which involve activities governed by the Consumer Credit Act 1974. This includes second-charge mortgage loans, buy-to-let mortgages, and non-mortgage personal loans (including credit cards). Also, where the firm concerned is not a firm or an appointed representative, the OFT may take enforcement action under the Regulations in respect of financial services contracts involving the carrying on of regulated activities (see EG 10.16 and 10.17).
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UNFCOG 1.1.4

handbook-guidance
This Guide applies to:
(1) firms;
(2) appointed representatives; and
(3) other persons, whether or not a person with permission, who use, or recommend the use of, contracts to carry on regulated activities.
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UNFCOG 1.1.5

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This Guide uses "firm" to refer to all such persons.
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UNFCOG 1.2

Introduction

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UNFCOG 1.2.1

handbook-guidance
This Guide explains the FSA's formal powers under the Regulations. It does not contain comprehensive guidance on the Regulations themselves, and you should refer to those Regulations for further details.
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UNFCOG 1.2.2

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This Guide also provides guidance on the approach we take before considering whether to exercise our formal powers under the Regulations.
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UNFCOG 1.2.3

handbook-guidance
The FSA has powers as a qualifying body under the Regulations. The Regulations are not made under the Act, but, under the Regulations our functions are treated as functions under the Act. This:
(1) makes the regulatory objectives relevant to forming policy that governs the discharge of our 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;
(4) allows the FSA to use its power to give guidance;
(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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UNFCOG 1.2.4

handbook-guidance
(1) As such, we publish on our website details of cases that result in a change in the contract terms used by the firm. This may happen through either an undertaking by a firm or injunction obtained from the courts.
(2) Under regulation 14 of the Regulations the FSA has a duty to pass details of these cases to the OFT.
(3) The OFT also publishes details of cases that it, and other qualifying bodies, have dealt with in accordance with the OFT's duties under regulation 15 of the Regulations.
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UNFCOG 1.3

The Unfair Terms Regulations

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Terms to which the Regulations apply

UNFCOG 1.3.1

handbook-guidance
(1) The 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 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 EU as a whole are party.
(3) Terms written in plain, intelligible language cannot be reviewed for fairness within the meaning of the Regulations if the terms relate to:
•the definition of 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, we can review terms concerning these matters for fairness within the meaning of the Regulations if they are not written in plain, intelligible language. We do not consider that it is enough that a lawyer could understand the term for it to be excluded from such a review. The term must be plain and intelligible to the consumer.

When a term is 'unfair' within the meaning of the Regulations

UNFCOG 1.3.2

handbook-guidance
Terms 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

UNFCOG 1.3.3

handbook-guidance
(1) Under regulation 13 we have the power to request, for certain purposes:



'(a) a copy of any document which that person has used or recommended for use, [...] as a pre-formulated standard contract in dealings with consumers;



(b) information about the use, or recommendation for use, by that person of that document or any other such document in dealings with consumers.'
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UNFCOG 1.3.4

handbook-guidance
(1) Unless the case is urgent, we will generally first write to a firm to express our concern about the potential unfairness of a term or terms (within the meaning of the Regulations) and will invite the firm to comment on those concerns. If we still believe that the term is unfair, we will normally ask the firm to stop including the term in new contracts and to stop relying on it in any concluded contracts. If the firm either declines to give an undertaking, or gives an undertaking but fails to follow it, the FSA will consider the need to apply to the courts for an injunction under regulation 12.
(2) In deciding whether to ask a firm to undertake to stop including a term in new contracts and to stop relying on it in concluded contracts, we will consider the full circumstances of each case. Several factors may be relevant for this purpose and the following list is not exhaustive, but will give some indication of the sorts of things we consider:
(a) whether we are satisfied that the contract term may properly be regarded as unfair within the meaning of the Regulations;
(b) the extent and nature of the detriment to consumers resulting from the term or the potential harm which could result from the term;
(c) whether the firm has fully cooperated with the FSA in resolving our concerns about the fairness of the particular contract term.
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UNFCOG 1.3.5

handbook-guidance
Regulation 12 states that:



'(1) The [OFT] 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.'



The FSA is a qualifying body for the purposes of regulation 12. Our approach to seeking an injunction under the Regulations is set out in Chapter 10 of EG.
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UNFCOG 1.3.6

handbook-guidance
Regulation 8 states that an unfair term is not binding on the consumer but that the contract will continue to bind the parties if it is capable of continuing in existence without the unfair term. Therefore, if the court finds that the term in question is unfair, the firm would have to stop relying on the unfair term in existing contracts governed by the Regulations.
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UNFCOG 1.4

The Unfair Terms Regulations: the FSA's role and policy

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UNFCOG 1.4.1

handbook-guidance
The FSA may consider the fairness of a contract within the meaning of the Regulations following a complaint from a consumer or other person or on its own initiative if the contract is within its scope.
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UNFCOG 1.4.2

handbook-guidance
There are three main ways in which we might receive a complaint from a consumer or other person. These are:
(1) directly; or
(2) from another qualifying body which considers that the FSA should deal with the complaint; or
(3) from the OFT.
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UNFCOG 1.4.3

handbook-guidance
(1) The main way in which we would act on our own initiative is to undertake a review of contracts in a particular area of business. This might involve looking at the contract terms used by several firms in a particular sector.
(2) We will, for example, consider launching such a review if multiple consumer contract complaints or other intelligence lead us to believe that under the Regulations there may be a contractual issue of wider significance to firms and consumers.
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UNFCOG 1.4.4

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If, following either a complaint or an own-initiative review, we consider that a term in a contract is unfair, we may challenge firms about their use of that term.
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Interaction with the FSA's powers under the Act

UNFCOG 1.4.5

handbook-guidance
(1) The FSA will consider using its powers under the Regulations in the context of its wider regulatory powers under the Act.
(2) In some cases, it might be appropriate for us to use other powers to deal with issues identified under the Regulations. The powers available to the FSA under the Act may vary depending on the regulated activities which the firm carries out. For example, the use of the unfair term might involve a breach of a Principle or a rule in COBS, MCOB or ICOBS. If so, the FSA might also address the issue as a rule breach.
(3) We may, in some circumstances, consider treating the matter under our powers in the Act itself and also under the Regulations.
(4) However, the use of our powers under the Act will not be possible in all cases where a firm has used an unfair term. If we consider using an enforcement power under the Act, we will do so in accordance with the policy relating to that power as set out in EG.

UNFCOG 1.5

Risk Management

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UNFCOG 1.5.1

handbook-guidance
(1) Where a firm has given an undertaking or a court has ruled the firm's term unfair, then the FSA considers it desirable that the firm should promptly notify clients with whom it has already concluded contracts of the effect the undertaking or ruling will have 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 which need mitigation. For example, firms should consider the effect of regulation 8 of the Regulations which provides that an unfair term is not binding on the consumer, but that the contract will continue to bind the parties if it is capable of continuing in existence without the unfair term. The mitigation may involve the firm contacting existing customers to ask that they agree to an amended contract, although any such amendment will itself need to avoid unfairness within the meaning of the Regulations and to 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 about other firms, since these will be of potential value in indicating the likely attitude of the courts, the FSA , the OFT or other qualifying bodies to similar terms or to terms with similar effects.
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UNFCOG 1.6

Redress

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UNFCOG 1.6.1

handbook-guidance
(1) The FSA does not have the power under the Regulations to grant redress to consumers who have suffered loss because 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, 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 EG 11.
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UNFCOG 2

Statements of Good Practice on fairness of terms in consumer contracts

UNFCOG 2.1

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UNFCOG 2.1.1

handbook-guidance
In Annexes 1 and 2 you will find 'Statements of Good Practice' where we have set out our views on the likely application of the Regulations in relation to certain types of clause in standard form consumer contracts. We will add further Statements of Good Practice relating to the Regulations as and when they are published. Please note that these Statements of Good Practice do not form general guidance on rules under the Act.

UNFCOG 2 Annex 1

Annex 1

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Fairness of terms in consumer contracts: Statement of Good Practice (May 2005)





www.fsa.gov.uk/pubs/other/good_practice.pdf
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UNFCOG 2 Annex 2

Annex 2

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Fairness of terms in consumer contracts: Statement of Good Practice on mortgage exit administration fees (January 2007)


www.fsa.gov.uk/pubs/other/meaf_goodpractice.pdf
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