In May 2018 the FCA launched a consultation on new guidance on the fairness of variation terms in financial services consumer contracts under current legislation and in light of recent case law of the Court of Justice of the European Union. This guidance is highly relevant to building societies, as unilateral variation terms are commonly used in financial services consumer contracts and are often essential to ensure that products can evolve in accordance with changes to legal and regulatory environments and market conditions. This is particularly the case for contracts of long or indeterminate duration, such as current accounts or mortgage agreements. Appropriate drafting is required to avoid such terms being deemed unfair by the courts and the regulators. The Consumer Rights Act 2015 (CRA) is the key piece of legislation.
According to the new proposed guidance, financial institutions should take into account a number of areas when drafting and reviewing variation terms. These include the transparency of the variation term, the validity of the reason for using such term, the notice required, and the customer’s freedom to exit the contract if choosing not to accept the variation. The consultation seeks views on a non-exhaustive list of factors that the FCA considers relevant when determining the fairness of a variation term. These go beyond the provisions found in the CRA and case law and include:
- Need for a legitimate objective behind the variation term
- Scope and effect of the variation of the term – does it go beyond that necessary to achieve the legitimate objective?
- Whether or not the term can operate in the consumer’s favour, for example price decreases as well as increases
- Transparency of the variation term – is the language clear and are the consequences of the term and its triggers clearly explained to customers? The latter point raises questions for longer term contracts around the practicality of being able to foresee and cater for future changes in market/economic conditions and the degree of detail around, for example, interest rate setting policies
- Provision for customers to be given prior notice upon exercise of the variation term is essential
- Freedom to exit – can the customer freely terminate the contract (in legal and practical terms) if the variation clause is engaged?
- Striking a fair balance between the legitimate interests of the firm and the consumer. This can be compared with the fairness test in the CRA which requires a “significant imbalance” to the detriment of the consumer
The proposed guidance also includes the FCA’s views on the validity of some of the reasons commonly cited by firms for varying terms in consumer contracts. Reasons which relate to matters outside the firm’s control, such as changes in technology, legislative changes/regulatory requirements, or changes to costs of funding are likely to be valid. By contrast, reasons citing the need to remain competitive, a provision which is commonly seen in terms at present, and statements that the terms may be varied “for any other reason” may be unlikely to be valid due to a lack of transparency.
The proposed guidance appears to be more consumer friendly than previous guidance and firms may wish to respond before the deadline on 7 September 2018 addressing their specific concerns. The FCA plans to issue a response in December 2018. Thereafter firms should monitor for the finalised guidance with a view to implementing it within their existing governance frameworks.