Unfair terms not only breach the Unfair Terms in Consumer Contracts Regulations, but also firms' wider obligations to treat customers fairly. Too many firms are passively relying on someone else telling them when to amend their contracts, rather than proactively reviewing all their standard terms on a regular basis, according to the FSA.
The Regulations provide that a firm must not include terms in standard contracts that disadvantage consumers by creating a "significant imbalance" in bargaining power between the parties. Such terms will not be binding on the consumer.
Terms that have been deemed unfair by the FSA include provisions that prevent any refund if the customer cancels a single premium payment protection insurance policy and excessive administration fees imposed for the early redemption of a mortgage.
Breaches are usually resolved by the firm undertaking to remove or amend the offending term. Undertakings are regularly published on the FSA and Office of Fair Trading websites.
The FSA has spent the last few months measuring firms' knowledge of and compliance with the regulations. Its findings were published on 5th June, together with the results of an anonymous survey of 120 firms by independent research company GfK MOP.
Most of the firms questioned knew about the regulations, but awareness levels were lower amongst smaller firms. Some intermediaries, in particular, mistakenly believed the regulations did not apply to them, even though they had standard terms of business agreements with their consumer clients.
Smaller firms also tended to be over-reliant on the services of external compliance consultants without properly checking the work they were carrying out.
Over half of a sample of 60 standard contracts contained at least one "variation term" which the FSA considered unfair under the regulations.
Variation terms allow firms to make a change to the contract without the consumer's agreement. Not all variation terms are unfair, however, provided the firm abides by the FSA's published statements of good practice.
For firms wishing to keep their contracts in order, the paper recommends regular (not just annual) reviews of all standard consumer contracts. Additional reviews should take place if the firm receives a complaint, cancellation or anything else that suggests a term might be unfair.
To keep themselves up to date, firms should carefully monitor information on unfair terms published by the FSA and the OFT (including undertakings given by other firms) and any industry guidance issued by trade bodies.
