DTI considers proposals to allow other bodies to enforce Unfair Terms in Consumer Contract Regulations.

This article first appeared in Insurance Day in April 1999

We should all be familiar with the Unfair Terms in Consumer Contract Regulations. They have been in force for the last two and a half years and are enforced by the Office of Fair Trading. However, the DTI is currently considering proposals to allow other bodies to enforce the Regulations. It seems a pretty safe bet that the powers will be extended to the Consumers’ Association and to local Trading Standards Departments (TSDs). But it is not inconceivable that the statutory regulators such as Ofwat, Oftel, Ofgas and perhaps even the FSA could also win the chance to enforce the rules. Is this a cause for concern?

The standard terms and conditions of a contract of insurance have to comply with the Regulations the terms are to be relied upon against a consumer. A consumer is not bound by any standard terms in a contract which are unfair.

Two questions have to be answered in deciding whether a standard term in a contract is unfair. First, does the term create a significant imbalance in the party’s rights and obligations under the contract, to the detriment of the consumer? Secondly, does that imbalance amount to a breach of the requirement of good faith?

In looking at good faith, one has to consider the relative bargaining strengths of the consumer and the business, and whether the business’ behaviour was fair and equitable.

How has the OFT gone about its enforcement duties?

The OFT can apply to the courts for an injunction to stop unfair terms being used. There have been a number of occasions when the OFT felt it necessary to threaten to take a case to court and, on several cases, an agreement was reached only when the issue of an application for a High Court injunction had become imminent. However, to date, no cases have gone to court.

The OFT publishes regular bulletins which give general guidance and case studies of the sorts of clauses which have been dealt with and which have been amended after negotiations with the suppliers. The OFT is looking at publishing a free-standing “directory” of the specimen terms considered to be potentially unfair drawing from the more significant cases summarised in the bulletins.

The OFT only acts when it receives a complaint. It will then consider the merits of the complaint under the Regulations. If the complaint is thought to raise issues of unfairness, the relevant case officer will approach the supplier asking them to modify or drop the particular term from its contract. They may ask for more information before making a decision about unfairness. When the supplier belongs to a trade association, the OFT may decide to approach that body as well so that information on best practice can be disseminated to a wider audience.

The overwhelming number of cases are resolved by negotiation. Since the inception of the Regulations in July 1995 more than 1,200 contract terms have been successfully challenged.

The OFT has identified the need to widen the number of bodies who have responsibility for enforcement and this being actively considered by the DTI. The OFT is concerned that breaches of the Regulations by small local traders may not be brought to its attention. It also believes that such breaches would be dealt with more effectively at a local level where trading standards officers are on hand to give advice and guidance.

This does raise the question of consistency of enforcement. At present, the enforcement process works well in that a company deals with one team of OFT case officers who have dealt with a large number of such cases over the years. The case officers are advised by a close-knit team of lawyers with a consistent and balanced approach to the issues.

If the local trading standards departments and the Consumers’ Association are to have powers to enforce the Regulations, insurance companies will be concerned that they could be dealing with a body which takes a stronger line than the OFT. An enforcement approach does develop and mature with experience. Provided there are clear and open communication lines between the OFT and the new enforcement bodies, and clear guidance is issued, there is every chance that the enforcement will be proportionate and seamless.

A wider range of enforcement bodies could be good news. For example, if the complaint relates to a term in a contract for an investment product, the FSA would be best placed to review the fairness of the term. It understands that particular sector, which terms are standard and which terms are included in order to comply with the financial services rules and regulations.

Whatever is proposed by the DTI, the European directive upon which our regulations must be founded, makes it clear that the aim is to ensure that “in the interests of consumers and competitors, adequate and effective means exist to prevent the continued use of unfair terms in contracts”. Whether what is proposed by the DTI turns out to be adequate and effective remains to be seen.