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UK’s Financial Conduct Authority Consults On New Guidance On Variation Terms Under Unfair Terms Legislation

Date 17/05/2018

The Financial Conduct Authority (FCA) is consulting on new guidance outlining factors financial services firms should consider under the Consumer Rights Act 2015 (CRA) when drafting and reviewing variation terms in their consumer contracts. The CRA implements Council Directive 93/13/ECC on unfair terms in consumer contracts (the Directive).  

Under the CRA the FCA has the power to consider the fairness and transparency of terms in consumer contracts. Where the FCA considers a variation term in a contract to be unfair or lacking in transparency, it may take action to prevent the firm from relying on that term. 

Fairness and transparency are not new requirements under the CRA. Before it came into force, firms were required to draft fair and transparent terms in consumer contracts under the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs) and the preceding Unfair Terms in Consumer Contracts Regulations 1994 (the 1994 Regulations). The draft guidance provides references to the relevant provisions in the UTCCRs, and sets out its application to contracts entered into under the 1994 Regulations. It is relevant to all consumer contracts issued by firms following the entry into force of the UTCCRs.   

The draft guidance outlines a number of non-exhaustive areas the FCA believes firms should have regard to when drafting and reviewing variation terms.  These include and are not limited to the following:

  • The validity of the reason(s) for varying a term
  • The transparency of the variation term
  • Provision for notice in the variation term
  • Provision for freedom to exit the contract should a consumer not wish to accept the variation

The draft guidance outlines factors for firms to consider when seeking to draft variation terms, and also considers a number of reasons that the FCA has observed firms commonly include, when drafting variation terms allowing them to alter their consumer contracts.

The FCA has published the proposed new draft guidance following the introduction of the CRA and in light of a number of rulings on variation terms in the Court of Justice of the EU. The FCA does not propose to conduct a proactive systemic review assessing the fairness of variation terms in contracts entered into prior to any eventual final guidance being issued. Our day-to-day unfair terms case work has considered variation terms from a variety of products and does not suggest that variation terms have generally been used in a manner likely to cause widespread harm to consumers. Where unfair terms come to the FCA’s attention, and it considers that firms have been relying upon such terms to the detriment of customers, the FCA will challenge firms accordingly.

Background

  1. GC18/2: Fairness of variation terms in financial services consumer contracts under the Consumer Rights Act 2015
  2. The Competition and Markets Authority has a lead role in relation to unfair terms law, but shares most of its consumer powers with a number of other agencies, including the FCA in relation to financial services contracts (The Competition and Markets Authority is an independent non-ministerial department, which works to promote competition for the benefit of consumers, both within and outside the UK. Its aim is to make markets work well for consumers, businesses and the economy).
  3. In July 2015, the CMA published detailed guidance(link is external) on the unfair terms aspects of the CRA which remains applicable to all firms.
  4. The draft guidance makes clear that the FCA considers that variation terms in financial services contracts are not exempt from the fairness test, merely because they fall within an exception to the statutory list of terms which may be regarded as unfair (commonly referred to as the ‘grey list’). The grey list and the exceptions to it are set out under Parts 1 and 2 respectively of Schedule 2 to the CRA.
  5. The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
  6. Find out more information about the FCA.