FCA prepares for Consumer Rights Act
The FCA last week removed much of its unfair contract terms guidance and a number of undertakings (mainly relating to the mortgage and investment sectors) from its unfair contract terms library, citing the need to update them in light of, amongst other things, the unfair contract terms provisions in the Consumer Rights Bill and the CMA's 2015 guidance consultation on those provisions.
The FCA stated that, whilst the removed undertakings are still binding as between the firms who gave them and the FCA, they may no longer reflect the FCA's current view on unfair contract terms. Accordingly, other firms should not rely on the content of them.
The Consumer Rights Bill is still passing through Parliament and the current expectation is that it will receive Royal Assent in Q2, 2015 and come into force in October 2015. The Bill brings together and builds upon the existing law on unfair terms currently contained in the Unfair Contract Terms Act 1977 (UCTA) and the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs). As you'd expect, the Bill maintains much of the language of the Europe-derived UTCCRs but strengthens them in a number of areas, including by extending them to cover negotiated, as well as standard, terms in consumer contracts; and consumer notices relating to rights or obligations between a trader and a consumer.
The Bill also adds to the "grey list" of consumer contract terms that may be regarded as unfair, which is currently contained in the schedule to the UTCCRs. Of most relevance to insurers is the addition of terms that have the object or effect of requiring the consumer to pay for services which have not been supplied, if the consumer ends the contract. Under FCA rules implementing the distance marketing directive, insurers are currently required to reimburse the premium where a consumer cancels his or her policy within the relevant "cooling-off" period, but policies are often silent on what happens to the premium where the policyholder cancels after this period. Once the Bill is in-force, a proportionate amount of the premium will have to be returned – and policy documents amended accordingly.
The Bill retains the current UTCCR exemption to the 'fairness test' for terms that specify the main subject matter of the contract (e.g. coverage exclusions) or set the price but adds a new requirement that, to benefit from this exemption, not only must terms be drafted in plain and intelligible language (as is currently the case), but they must also be "prominent" i.e. brought to the consumer's attention in such a way that an average consumer would be aware of the term. Under the Bill, the exemption will not apply to grey listed terms.
The CMA's detailed guidance on unfair terms in consumer contracts, on which it is currently consulting (see above), will replace the OFT's guidance of September 2008 (OFT311) and will be the CMA's main guidance on the unfair terms provisions contained in the Bill. The CMA expects to issue this guidance in final form in May 2015.
In light of the above, firms should be reviewing the draft CMA guidance on unfair terms in consumer contracts and starting to think about how they might need to amend their product development and distribution policies and procedures to enable them to comply with the Bill when it comes into force, later this year.