The FCA wants to make their view clear on the appropriate way for firms to assess the fairness of variation terms in order to help firms to ensure that their variation terms are likely to be fair as the FCA do recognise the potential benefits of fair variation terms to both firms and consumers. The draft guidance focusses purely on unilateral variation terms, commonly used in financial services consumer contracts because the FCA acknowledge that these are some of the most complex terms to assess for fairness because of both the legislative provisions and case law which apply to them.
The “grey list” and variation terms
The CRA provides an indicative list of terms, commonly referred to as the “grey list”, which may be considered unfair which includes the following types of variation terms:
- Paragraph 11 - A term which has the object or effect of enabling the trader to alter the terms of the contract unilaterally without a valid reason which is specified in the contract;
- Paragraph 12 – A term which has the object or effect of permitting the trader to determine the characteristics of the subject matter of the contract;
- Paragraph 13 – A term which has the object or effect of enabling the trader unilaterally without a valid reason to alter any characteristics of the product; and
- Paragraph 14 - A term which has the object or effect of giving the trader the discretion to decide the price payable under the contract after the consumer has become bound by it, where no price or method of determining the price is agreed when the consumer becomes bound.
The guidance acknowledges that there are certain qualifications to the grey list for financial services contracts and contracts of indeterminate duration but makes clear that it is the FCA’s view (based on decisions of the Court of Justice of the EU) where a variation terms falls within one of these qualifications this cannot be relied upon to make the term fair. In such a case the term will still be assessable for fairness under the CRA.
Relevant factors for determining whether or not a variation term is fair
At the core of the draft guidance the FCA outlines a number of areas it believes firms should consider to determine whether a variation term is fair when drafting and reviewing variation terms. These include, but are not limited to:
- Has the firm included the variation term to achieve a legitimate objective?
- Are the reasons a firm uses to justify varying a contract (the “reasons”) no wider than is reasonably necessary to achieve a legitimate objective?
- Is the extent of the permitted change to a contract no wider than is reasonably necessary to achieve a legitimate purpose?
- Are the reasons objective?
- Is it possible to verify whether or not the reasons have arisen?
- Does the variation term allow for variations: <br/> <br/>both in favour of the consumer and the firm? (for example, price increases and decreases); or<br/> <br/> <br/>only in the consumer’s favour?<br/>
- Are the reasons clearly expressed?
- Will the consumer understand at the time the contract is entered into the consequences that a change to the terms might have for them in the future? Particularly, for a variation term that entitles the firm to vary the price: <br/> <br/>does the contract set out the method for varying the price?<br/> <br/> <br/>will the consumer understand the economic consequences of the variation term? <br/>
- What, if any, notice of any variation does the contract require the firm to give the consumer?
- Does the contract give the consumer the right to terminate the contract before or shortly after any variation takes effect? To what extent could that right be freely exercised in practice?
- Does the term strike a fair balance between the legitimate interests of the firm and the consumer?
In addition the guidance confirms the FCA’s view that fair treatment of consumers (for example, by providing sufficient notice and freedom to exit) will not automatically make an unfair variation term a fair one.
Annex 1 to the consultation contains a helpful summary of the existing guidance issued by the FCA that firms are expected to take into account.
Commenting on the Guidance
The deadline for comments on the draft guidance is 7 September 2018 and these can be submitted by:
•email to: [email protected]; or
•writing to: Tina Archer, Consumer Contracts Team, Financial Conduct Authority, 25 The North Colonnade, London E14 5HS.