FCA finalised guidance on fairness of variation terms in financial services consumer contracts: the devil's in the detail

The FCA published their finalised guidance on the fairness of variation terms in financial services consumer contracts under the Consumer Rights Act 2015 on 19 December 2018.

What's changed?

While there weren't many substantial changes from the FCA's draft guidance (see our previous blog post, 'FCA consultation on the fairness of variation terms in consumer contracts under the Consumer Rights Act 2015', for more detail on this), a number of helpful clarifications were made, including:

  • A new emphasis throughout the guidance on balancing the legitimate interests of both supplier and consumer when considering whether a variation term is fair.
  • The finalised guidance now states that firms should consider whether it is practicable to give a simple explanation, which the average consumer could understand, of the firm's likely approach to changing prices - the draft guidance had only made references to "the consumer" and whether it would be "practical in the circumstances".
  • When including price variations there's no need to provide customers with the detail of policies for changing interest rates due to changes in costs of funding, as had previously been suggested.
  • The FCA has explained that whether the consumer would be able to exercise the right to terminate the contract in practice should be judged at the time the contract is concluded.

Importantly, the FCA has emphasised that the responsibility for ensuring that consumer contracts are fair lies with senior managers.

Although the FCA's clarification that firms with longer term contracts of determinate duration may be entitled to vary those contracts "for any reason" is helpful, the FCA's approach generally doesn't go far enough to accurately reflect the derogations from the grey list (in Schedule 2, part 2, paragraphs 21 and 22).

What will firms need to give further thought to?

The devil's in the detail:

  • Although the fairness of a term must be judged as at the date when the contract is made, account may also be taken of the likely effect of the term when the contract is put into effect.
  • The FCA has stated that the reason "to remain competitive" would generally be unlikely to be valid, given that it is not part of the cost of providing the product. They've noted that firms should carefully consider whether a right to vary for this reason would strike a balance between the legitimate interests of the firm and those of the consumer.
  • The finalised guidance notes that firms may want to include a term in the contract that requires them to explain to the consumer, during the life of the contract, the reason for any proposed variation and its consequences for the consumer.
  • The focus on transparency and relevant EU case law has remained.

Firms will want to review their variation clauses in the light of the final guidance to ensure they reflect best practice. If you would like to discuss the implications of the guidance for your firm please contact us.

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