FSA’s approach to the use of its powers under the Unfair Terms in Consumer Contracts Regulations 1999

FSA is a qualifying body under the Regulations and has agreed with the OFT to take lead responsibility under the Regulations for most investment, pension, insurance, mortgage and banking contracts. The OFT remains responsible for personal loans and credit cards. FSA can therefore review the fairness of standard contracts in areas that are not yet regulated under FSMAct, namely mortgages and general insurance. FSA will only take enforcement action against authorised firms, referring other cases to the OFT (4.4).

In exercising its powers, which it sees as an adjunct to its other regulatory “tools, FSA will take into account the relevant provisions of the Handbook (4.8, 4.10). FSA also notes that wider supervisory concerns may flow from issues falling within the Regulations, such as whether it is treating customers fairly under Principle 6 (4.9). FSA’s approach will be to seek to talk constructively with a firm that transgresses the Regulations, and obtain an undertaking where possible, but taking enforcement action when necessary (4.11).

FSA will also take proactive thematic reviews where justified by the risk-based approach of FSA’s ARROW methodology, which could entail collecting and analysing a sample of contracts, identifying unfairness, proposing solutions in a discussion paper, agreeing an improvement programme and dealing as necessary with individual firms (4.15 – 4.17). When necessary FSA will consider issuing guidance on the Regulations and amending COBs (4.19, 4.22).

While the Regulations do not empower FSA to compensate customers who have suffered loss because of an unfair term, it expects firms to handle such complaints fairly under DISP, and considers that FOS will take the Regulations into account when adjudicating on a complaint (4.24).

FSA proposes a new Chapter 20 in ENF addressing unfair terms in consumer contracts, which will contain guidance on FSA’s approach:

· The Regulations apply to non-individually negotiated terms between a seller/supplier and a consumer. FSA can only review terms relating to the main subject matter of the contract or the adequacy of price or remuneration if they are not written in plain, intelligible English which a consumer could understand.

· A term will be unfair if, contrary to good faith, it causes a significant imbalance in rights and obligations to the consumer’s detriment. FSA states in the CP that terms that reserve some degree of discretion to the firm need to ensure that consumers are not subject to arbitrary and unilateral changes of approach, and that the service is delivered in line with a set of defined principles or parameters that are properly communicated to the consumer (2.3).

· FSA will usually first approach a firm and seek an undertaking to cease use of the term, and not to rely upon it when already in use. This may involve the firm contacting its customers.

· In the absence of cooperation, FSA may apply for an injunction to halt the use of such terms.

· FSA may also take use of the term as a breach of COBs and take enforcement action against that firm.

· FSA will publish important decided cases on its website.

This consultation paper is also available at http://www.fsa.gov.uk/pubs/cp/cp148.pdf.