Unfair Contract Terms – Ensuring a Fair Deal for Consumers

This blog is gist of speech by Clive Gordon at the FSA’s Unfair Contract Term’s Seminar on Wednesday 21 March 2012

  

Introduction

The contracts you have with your customers are among the most important that a business can have. Certainty about your obligations to your customers and theirs to you, are the lifeblood of your businesses. It is very important, therefore, that you get your consumer contracts right.

We want to use the time we have today to help you understand our view of what terms are unfair, what we consider is good practice and what we consider is poor practice. But, in the end, it is you and your senior management who are responsible for ensuring that your contract terms are fair.

It’s hard to argue with the principle that fair contract terms should be the basis on which all of you conduct your business, but it’s also important to remember that unfair terms can create serious problems and costs.

We could take action against you and you could end up in court and have unfair terms struck out. In these cases you would have to spend management time and energy dealing with putting things right, including perhaps paying significant compensation. You could lose business because consumers don’t trust you to deal fairly with them. 

Examples of poor practice

Despite the importance of consumer contracts, we remain disappointed in the lack of attention that many firms give to them. For example:

• by not reacting to legal and/or regulatory developments at the FSA or the OFT;
• by not reviewing contracts routinely; and
• the lack of good staff training or setting an example from the top down (if senior management are not aware of how a firm’s systems and controls operate, or what the contract approval processes are, it is unlikely that good practice will filter down through the rest of the firm).

Our concern about the inadequate attention that some firms give to their consumer contracts is mirrored by the experience of consumers themselves.

For this year’s Retail Conduct Risk Outlook, we commissioned consumer-focused research and found that some consumers had concerns about unilateral changes in their contract terms and the way that they were being treated by firms. Consumers were experiencing frustration with their dealings with firms.

To give you just one pet insurance example, one respondent’s dog had an ongoing complaint with its back leg. The dog was then, unfortunately, diagnosed with diabetes. When the respondent submitted the insurance claim for treatment she was informed, over the phone, by her insurance company, that they had, in fact, cancelled her policy because her dog had died. During the phone call, the insurance firm were insisting that the dog was dead even though the dog in question was barking away in the background.

After she complained to a head of department she was sent a new policy but was disappointed to find that the nature of the cover for her dog had changed, so it no longer covered the diabetes the dog had been diagnosed with.

I’d like to share with you the sense of frustration that this particular consumer had. She said: ‘they changed like, half of it and it didn't cover the diabetes side of it and they won’t start me on what the old policy was .... who else is going to insure[my dog] now?’. ‘They had me over a barrel. I can’t get to anybody. I can’t get to the right person. Nobody’ll give me a name who I can write to, to complain. I’ve spoke to the head of department, I’ve spoke to this one, I’ve spoke to that one, I’ve complained’.

This consumer’s experience shows that a number of issues are often inter-related: contract terms, complaints-handling, a firm’s practices and its systems and controls.

The research we carried out also showed that consumers:

• thought that their contracts were too complicated and needed to be simpler, clearer and in plain English;
• they were unhappy about firms changing their terms and conditions before the end of the contract term; and
• they wanted their contract terms to reflect the natural meaning of words – for example, consumers had been misled by seeing an everyday word, such as ‘redundancy’ in their contract, only to find that this word was a defined term in the contract and given a different meaning by the firm.

Where there is confusion about which contract term prevails, or what an unintelligible contract term means in practice, consumers cannot fully appreciate what service they should be receiving from you. This means consumers may not be receiving a fair deal. It is surely not good business practice for you to be using contracts which are difficult to understand or confusing – why would you want to do this? 

Systems and controls

I am often surprised by the number of times a firm will respond to concerns we raise about a particular contract term by saying ‘ah well, yes, actually, we don’t ever enforce that particular term’. Well, if this is really true, then what is it doing in the contract in the first place? What does it say about a firm’s systems and controls if its contracts contain terms which it has no intention of applying? How is a consumer supposed to know that?

Our concern about systems and controls has led us to conduct an increasing amount of work in this area. We want to identify the root causes of why some firms continue to have unfair terms in their contracts.

We think that the wording of contracts should be something that you should consider at the product design stage, to ensure that the contracts are clear and fair and accurately reflect the features of the product as designed. Our interest in this is in line with our objective of adopting a more intensive and intrusive supervisory approach. We want to tackle the underlying cause of problems and not just the symptoms. 

Examples of good practice

However, I should say that it is not all doom and gloom. We have come across some very good practices, which I would like to share with you:

• First, we have met some of you and you have told us how you review our published notices of undertakings against your own contract terms. Notices of undertakings provide you with an indication of what type of terms we consider are likely to be unfair.
• Second, we have seen some of you considering your contract terms at the product design stage, ensuring that you have appropriate contract approval processes and the systems and controls in place to ensure that someone with the requisite skills and knowledge is providing sign-off. In addition, some of you are regularly reviewing your contracts.
• Third, I think staff training is key. If your front-line staff are aware of how contract terms are worded and operate in practice, this can influence how they are perceived by consumers, because it is these staff that they meet and talk to.
• Finally, and perhaps most importantly, to achieve all of the above, you need to have support from your senior management. We have seen examples of this in practice. In one instance, we were in discussions with a firm’s compliance officer about the firm’s contract terms and were experiencing some resistance in relation to amending these terms. However, when the CEO became aware of the issue, it was resolved very quickly and the CEO’s attitude filtered down through the firm.

We have seen some great examples of where some of you have been determined to make sure that your contracts are in line with the Regulations. Some of you have even gone beyond what is indicated by the Regulations, where you thought this was in the best interests of your consumers.

We have also noticed that some of you take pains to ensure that your contracts are easy to read and understand. You group together similar terms and adopt a clear layout. Some of you also highlight important or onerous terms, which we think encourages fair treatment of your customers. 

How we are helping you

So how can we help you? We want you to give your customers a fair deal. But we still see too many problems caused by unfair contract terms. Although getting contract terms right is your responsibility, we try to help you understand how to get this right.

In publishing our notices of undertakings we aim to help you by being open and explaining our reasoning as to why we think a particular contract term is likely to be unfair. Historically, our undertaking notices have been relatively short but, in recent years, we have set out the rationale for considering that a particular term is likely to be unfair. We have done this to help you understand our approach and what is expected of you. We also think that including a greater level of detail, helps you to read across the principles from one financial sector to another.

We will continue to publish undertakings where we consider that firms have included terms in their contracts that are likely to be unfair. This helps consumers and firms by making them aware of:

• the changes that a particular firm is making to a contract; and
• what types of term are likely to be unfair in general.

In future we may publicise undertakings more to ensure that the message reaches consumers and firms. 

Conclusion

In conclusion, by publishing our most recent guidance on unfair contract terms, and running this seminar, we are making our expectations clear. It means that there can be no more excuses from you that you have misunderstood how the Regulations work.

I encourage you to engage with today’s sessions as fully as possible. Our work and your work, however, will not stop at the end of today’s seminar. We hope that you will be able to take what you have learnt today and be proactive about reviewing your contracts and making any necessary changes.

The key messages that I would like you to take away today are:

• First, it is your responsibility to ensure that your contracts are compliant and treat your customers fairly so that they get a fair deal.
• Second, we expect to see improvements in your contract terms to ensure that consumers receive a fair deal. If you are not prepared to engage with the Regulations, then we are prepared to go to court to seek an injunction to prevent you from relying on an unfair term.

It would be a very positive development indeed for you and for me if, in the future, we both had to spend less time and resource on unfair contract terms.

As Martin Wheatley, the FCA’s CEO designate, has recently said, we are expecting more from firms as we move into the new world of the FCA. We believe not only will this lead to a fairer deal and better outcomes for consumers, but a healthier and more efficient market.