Impact of recent Unfair Contract
Term Court cases and the Consumer
Rights Act 2015?
Protect Golf Day, 21 June 2016
Richard Bostock, FLA
Tiger
Bostock
Introduction
• Firms will now need to review the use of the core terms
exemption in its amended form – initial prices are now
assessable if they are not transparent and
prominent (Consumer Rights Act 2015)
• Review how you use ‘valid reasons’ in contracts in light
of greater focus on the matter, as a result of the 2015 Act
and certain European Court Judgements…and UK one
too
• Some firms might consider this a good time to review
overall arrangements for provision of information to
customers (including contract terms). Also bare in mind
FCA work in this area, including having Unfair Terms as
one of its forward-looking risk areas (in its latest
Business Plan), Smarter Disclosure etc..
Introduction
• Worth noting that UK Courts are obliged to take into
account criteria identified by the Court of Justice of
the European Union (CJEU) when assessing the
fairness of contract terms in consumer contracts
• As far as the 2015 Act implements the Directive on
Unfair Terms, UK Courts will interpret the Act in
the light of the CJEU Judgements
• FCA recently commented that CJEU cases will be
specific to each firm and its contracts, but…
• The CJEU judgements make it clear that it’s best not
to use the catch-all formulae “or any other valid
reason”.
Conclusion
• Members might want to look at their contract terms
to see if they comply with the general fairness test in
relation to significant imbalance and good faith or
provision of information in general, with a view to
being satisfied that as an overall package consumers
review clear, intelligible and (where appropriate)
prominent information.
• Check substantive terms for fairness and
imbalances e.g. what would an ‘average’ customer
reasonably expect? And do the terms help to meet
them?
Conclusion
• Use plain, intelligible language – e.g. do not use
technical language or references to law or regulation, unless
you have to. And where you do, consider including brief, plain
language explanations in glossary in user-friendly
accompanying literature e.g. a summary that is crossreferenced to, if practicable.
• Pay special attention to the higher-risk terms, e.g.
typically, contract clauses relating to – unilateral interest rate
variations; fees, costs and expenses; discretion to make
changes to other contract features potentially to a consumer’s
detriment – as far as practicable, assess contingencies in
advance in order to be transparent by including them in the
contract
• Anything that potentially reduces a consumer’s legal rights
could be problematic.
Conclusion
• Examine such terms in relation both to substantive
fairness and also transparency, prominence and
reasonable explanation – as far as practicable, try to
eradicate unfair surprises for the consumer
• Consider carefully any specified valid reasons
• Remember that initial prices are now within scope of
assessment, unless they are set out in plain, intelligible
language and transparent and prominent etc.
• Consider reasonable ways to mitigate potential customer
detriment where practicable e.g. by building in notice, free
exit
• Wherever possible ensure fairness in relation to terms varying
interest rates – not primarily because of the 2015 Act, but due
to certain ECJ Judgements
Conclusion
• Examine terms to ensure consistency with other customer
materials e.g. marketing, product literature, FKI’s etc. And
transparency is more likely to be achieved if information is
conveyed early on, in brochures and even advertisements
• CMA’s guidance contains a discussion of transparency and
prominence in the context of the ‘core terms’ exemption. It
suggests, consider all the information given prior to
conclusion as well as relevant aspects of sales process, way
terms and conditions laid out, including structure and length
and amount of time given to consider contract etc.. i.e.
importance of clear and transparent sales, advice and
information processes
• Also worth noting that the fundamental fairness test is that
set out in Section 62(6) of the 2015 Act
Conclusion
• Finally, worth noting that Section 50 of the
Consumer Rights Act (2015) is new i.e. anything
written or said to a consumer would now be
bound in the contract and the consumer could
rely on. Would include advertising etc.
Lessons for Insurers
• There’s read across. What FCA says to one of its
constituents is usually across the piece (e.g.
SMR)
• FCA have made it very clear Contract Terms is
high up on their agenda (within latest Business
Plan)
• Why? It’s all about fair outcomes for consumers
and a balance of power reference consumers vs
Financial Services
• The acid test is do you think a term is fair?
Lessons for Insurers
What firms should focus on according to the FCA. These are the key messages FCA encourage
firms to focus on:
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Take into account consumers' legitimate interests in relation to contracts over which they
have had no influence but to which they will nonetheless be bound.
Fairness is not contrary to the prudent management of the business but part of it.
Relying on narrow technical arguments to justify a contract term that, in fact, may be
unfair, risks future challenge.
The fact that a term does not resemble any of the terms listed in Schedule 2 of the
CRA/UTCCRs may not, in itself, remove the risk of unfairness. Firms need to assess
whether a term is fair under the CRA/UTCCRs as a whole and in the context of the
particular product or service.
Take into account developments in legislation and relevant case law concerning Council
Directive 93/13/ECC on unfair terms in consumer contracts (including relevant UK and
European case law).
The CMA published guidance on the unfair terms provisions of the CRA on 31 July 2015.
They encourage firms to read this guidance.
Lessons for Insurers
• Previous slides shows what FCA are looking for
at a high level
• But they’ve removed their guidance because they
say it no longer represents their views in light of
the CRA and recent ECJ judgements
• But unhelpfully not been too specific what their
views are! (previous slide is indicative)
• Appear to be relying on the Competition and
Market Authorities (CMA) Guidance in this area.
Lessons for Insurers
• Rather unhelpfully they have also stated firms
should seek their own legal advice!
• Key though is transparency and contract terms
being in plain and intelligible English (case law talks
about a typical consumer being able to understand
not only the contractual language but also its effect)
• Under the CRA certain terms in consumer contracts
are assessed for unfairness, by ascertaining whether
the terms leads to an imbalance between a trader
and a consumer. So be aware!
Further Sources of Information
• CMA Guidance
• FCA (Unfair contract terms library)
• Further FCA information (Unfair contract
terms)