FCA consultation on the fairness of variation terms in consumer contracts under the Consumer Rights Act 2015

The FCA has published a consultation which contains draft guidance on the fairness of variation terms under the Consumer Rights Act 2015 (the "CRA") and the Unfair Terms in Consumer Contracts Regulations 1999 ("UTCCRs"). In March 2015 and May 2016, the FCA withdrew some of its unfair terms material from its website as a result of several European cases referred to the Court of Justice of the EU ("CJEU"). It has now decided to issue further guidance.

The FCA's draft guidance focuses on unilateral variation terms. The FCA acknowledges that fair unilateral variation terms can benefit both consumers and firms because they allow firms to offer competitively priced products, other than simple trackers, which creates greater competition in the industry and leads to more choice for consumers. It also acknowledges that its unfair terms case work indicates that firms’ use of variation terms has not generally led to consumer harm concerns.

What's in the guidelines?

The new draft guidance begins by confirming that:

  • variation terms cannot benefit from the "core exemption" under the CRA and are therefore assessable for fairness; and
  • the non-exhaustive and indicative "grey list" of terms contained in Part 1 of Schedule 2 to the CRA is subject to the qualifications in Part 2 of Schedule 2 to the CRA but that falling within one of the qualifications does not necessarily mean the term is fair.

The draft guidance then sets out the FCA's view on a number of areas, which are summarised below.

Factors relevant to determining whether or not a variation term is unfair


The FCA sets out a list of 11 factors that it considers relevant when assessing the fairness of variation terms. The factors concern the firm's aims in having the right to vary the terms of the contract, the scope and effect of the variation term, the transparency of the variation term, whether the term contemplates changes in the consumer's favour, notice, and the consumer's freedom to exit their contract.

The FCA also states that fair treatment of consumers under a variation term will not change an unfair term into a fair one and that the FCA may still take action under the CRA to ensure that only fair terms are used in consumer contracts.

Validity of reasons

In general, the FCA's view is that reasons are more likely to be valid if they relate to matters outside a firm's control.

  1. Changes in technology or systems
  2. The guidance states that variation terms that allow firms to increase costs due to changes in technology or systems are generally likely to be fair because they are part of the costs of providing products. Relevant factors in assessing the validity of the term will include the duration of the contract, which costs are being passed on to consumers, and whether those costs relate to the consumer's product (as opposed to costs that are common to a number of products).

  3. Changes in regulatory or legal requirements
  4. The FCA's view is that changes made to reflect regulatory or legal requirements are likely to be fair because it is in consumers' interests that firms comply with the law. However, variations that go beyond what is necessary to comply with the change in regulation or law are less likely to be compliant.

  5. Changes to cost of funding
  6. The guidance states that the cost of funding is part of the costs of providing the product and it is appropriate for firms to manage the risks posed by changes to their cost of funding. A fairly drafted variation term may therefore be an appropriate term for firms to use. Relevant factors when assessing validity will include the duration of the contract, the nature of the product, and whether consumers generally understand that these costs will be passed on.

  7. Remaining competitive
  8. The FCA's view is that remaining competitive is not a part of the cost of providing the product and it is unlikely to be an objective, clear and intelligible criteria for varying the terms.

  9. Statements that firms can vary the terms for another reason or an indication that the list is non-exhaustive
  10. The FCA draws a distinction between:

  1. contracts of determinate duration, where including such terms are unlikely to be valid; and
  2. contracts of indeterminate duration, where terms may be fair if the variation enables the firm to achieve no more than it would if, rather than varying the current contract, the firm gave the consumer notice to terminate and offered consumers a new contract on different terms.

Whether or not the term operates in the consumer's favour

The draft guidance states that many of the reasons relied on by firms to change the terms may also justify making changes in the consumer's favour. In assessing the fairness of variation terms, the FCA will consider whether firms' variation terms contemplate variations that are in favour of consumers.

Transparency

The FCA states that firms should consider how their variation terms reflect the elements of transparency highlighted by the CJEU in recent cases, including "whether the loan agreement sets out transparently the reasons for and the particularities of the mechanism for altering the interest rate and the relationship between that mechanism and the other terms relating to the lender's remuneration, so that customers can foresee, on the basis of clear, intelligible criteria, the economic consequences for him".

Notice

In the FCA's view, provision for notice in the variation term is important because it enables consumers to react and take the action that is most appropriate for them. When deciding what the appropriate amount of notice should be, firms should take into account how long consumers need to shop around for to find an appropriate alternative product if they reject the change. Personal notice is likely to contribute to fairness as it is the best way to ensure consumers are made aware of the variation.

Freedom to exit

The draft guidance states that when drafting variation clauses, firms should consider a consumer's freedom to exit contracts, including the financial and physical barriers in the contractual terms that may prevent them from doing so, as well as barriers outside the contractual terms.

The FCA's powers

The FCA makes clear that interpretation of the CRA is ultimately a matter for the courts and that its final guidance will not change the law. However, as a regulator under the CRA and a qualifying body under the UTCCRs, the FCA has the power to consider complaints on unfair terms and can take injunctive action against firms, preventing reliance on an unfair term.

What's next?

The FCA welcomes views on whether firms agree with the FCA's views on a number of important issues including:

  • the factors that the FCA considers relevant to determining the fairness of variation terms;
  • the validity of reasons for making variations;
  • the examples of reasons used by firms to vary terms;
  • transparency;
  • notice of variations; and
  • consumers' freedom to exit their agreements.

The FCA is asking for views on its draft guidance by 7 September 2018.

Please contact us if you would like to discuss how any aspects of the draft guidance published by the FCA impacts you.

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