Consumer Rights Act 2015—the impact on financial services firms

How will the Consumer Rights Act 2015 (CRA 2015) affect financial services contracts? In advance of the coming into force of CRA 2015 on 1 October 2015, Nikki Worden, a partner at Addleshaw Goddard, explains how it will affect those involved in financial services contracts.

What are the key features of CRA 2015 for those involved in financial services contracts?

CRA 2015 will have an impact on financial services providers if they enter into contracts with consumers. A ‘consumer’ is defined as ‘an individual acting for purposes which are wholly or mainly outside that individual's trade, business, craft or profession’. This departs slightly from other consumer legislation which apply in the context of financial services by introducing the concept of someone acting ‘wholly or mainly’ for non-business purposes. By contrast, for example, the Financial Services (Distance Marketing) Regulations 2004, SI 2004/2095 define a consumer as ‘any individual who...is acting for purposes which are outside any business he may carry on’.

CRA 2015 applies to all ‘contracts for the transfer of goods’ including conditional sale, hire and hire-purchase contracts. A financial services firm entering into these kinds of financial services contracts will be a ‘trader’ under CRA 2015 and will therefore be responsible for delivering the new remedies that consumers will have in relation to defective goods set out in CRA 2015, Pt 1. This may require closer liaison with the dealers and suppliers from whom such firms source their goods. Note that the new definition of ‘consumer’ will bring into scope sole traders and home-workers, who, for example, hire or buy goods on hire purchase for both home and business use, provided that the purchase is primarily for non-business purposes.

CRA 2015, Pt 2 will replace the Unfair Terms in Consumer Contracts Regulations 1999, SI 1999/2083 (UTCCR) for new contracts entered into from 1 October 2015. In conjunction with this, the Competition and Markets Authority (CMA) has issued new guidance on compliance with the requirements of CRA 2015, Pt 2 (LNB News 03/08/2015 82). The CMA has specifically pointed out that its guidance does not state the law, only its own views as to how the law is intended to operate—however, it is of importance both in terms of the likely development of domestic case law in this area going forward and in terms of its likely influence on the Financial Conduct Authority’s (FCA) approach to regulatory supervision and enforcement.

Generally, CRA 2015, Pt 2 carries forward, rather than changes, the protections provided to consumers under the UTCCR. Any changes are mainly to scope rather than substance (the CRA extends the scope to cover consumer notices and negotiated terms). The fairness and transparency provisions in CRA 2015 are effectively the same as those of the UTCCR. Importantly, however, English law relating to unfair terms has been developing and changing through decisions of the courts at both UK and European level. One of the CMA’s principal stated aims in publishing guidance has been to reflect the impact of those judicial decisions. Decisions of the Court of Justice of the European Union (CJEU) must be taken into account by domestic courts when interpreting provisions of CRA 2015, as it gives effect to Directive 93/13/EEC on unfair terms in consumer contracts (the Unfair Terms Directive). Existing case law, particularly recent decisions of the CJEU are, therefore, equally applicable to the interpretation of the UTCCR and CRA 2015. For more information about the treatment of unfair terms in the financial services sector, see Practice Note [insert reference to PAM 233542 - The financial services sector and unfair contract terms].

The FCA has removed a number of materials from its website while the FCA considers how they should be updated in light of CRA 2015. What is it about CRA 2015 that could give rise to the FCA changing its guidance?

Decisions of the CJEU since 2012 have driven a change in emphasis in the interpretation of the Unfair Terms Directive. While this is reflected in the new CMA guidance, the 2012 Financial Services Authority (FSA) guidance had become out of step with the interpretative approach taken by the CJEU.

For example:

  • where a term was indicatively unfair under the UTCCR, the 2012 FSA guidance expressed the view that a variation term was less likely to be unfair if:
    • there was a valid reason specified in the contract, or
    • for variations of interest rates or other charges, the term provided that the variation would be for a ‘valid reason’ (which was not specified in the contract) and the contract provided for the firm to give the consumer notice at the earliest opportunity thereafter (rather than in advance) and the consumer was free to dissolve the contract immediately, or
    • for a contract of indeterminate duration, the contract provided for the firm to give the consumer reasonable notice in advance of making the change and the consumer was free to dissolve the contract
  • recent CJEU decisions have made it clear that, in fact, there are no statutory exemptions from the requirement of fairness, rather there is an independent transparency requirement that must be satisfied as well—so, where a financial services firm reserves the right to vary interest rates or other charges in the agreement, a provision in the terms and conditions that:
    • says that the variation will be for an unspecified ‘valid reason’
    • ensures that the consumer is given notice at the earliest opportunity, and
    • gives the consumer the freedom to dissolve the contract immediately,

will not automatically make the term satisfy the test of fairness. The provision will only be fair if the consumer is able to see, on the basis of clear, intelligible criteria, the economic consequences for him which derive from it.

What will the FCA’s role be in challenging unfair terms in financial services contracts?

The CMA is the principal enforcer of CRA 2015, but the FCA will continue to have the rights to take action against firms that it previously had under the UTCCR in relation to unfair terms.

Historically, the FCA has taken a broad approach when looking at mortgage, general insurance, savings, life assurance, pensions and investment contracts. We expect this to continue, with consumer lending contracts now within their remit too. The FCA can look at contracts not only from the perspective of fairness under CRA 2015, but also from the perspective of whether or not firms are acting fairly and in accordance with the FCA’s Principles 6 and 7, which require firms to pay due regard to the interests of their customers and treat them fairly and to pay due regard to the information needs of its customers and communicate information to them in a way which is clear, fair and not misleading. This means that the FCA will look not only at the relevant customer terms, but also at firms’ conduct before, during and after conclusion of the contract, focussing on consumer outcomes.

In parallel with its specific powers under CRA 2015, the FCA is also designated ‘enforcer’ of CRA 2015 under the Enterprise Act 2002 as amended. This means that it will have powers to take action where it takes the view that any act or omission by a firm which contravenes CRA 2015, Pt 2 harms the collective interests of consumers. Again, these are powers that it already enjoyed in relation to the UTCCR.

What should financial services firms be doing at this stage?

Financial services firms entering into consumer hire, hire purchase and conditional sale agreements should look carefully at the impacts of CRA 2015, Pt 1 on those businesses and in particular on the new implied terms and remedies. There is concern that CRA 2015 may drive an increase in early cancellation and rejection of goods and therefore finance agreements, which would have both financial and operational impacts. The FCA will be expecting all financial services firms to be reviewing their consumer contracts in light of the new CMA guidance and taking steps to amend them for new customers. Where firms have contracts that are for indeterminate duration (such as current accounts and credit cards) those firms should consider varying them to ensure fairness.

Where financial services firms are considering portfolio sales and purchases or systems migrations, they should consider carefully whether the variation clauses in the pre-migration terms are transparent enough for those terms to be varied post-migration without risk of unenforceability under CRA 2015. Specifically, the new test is whether the relevant consumers are able to see, on the basis of clear, intelligible criteria, the economic consequences for them which derive from the power to vary.

Do you have any predictions for the future in this area?

The FCA, like the FSA before it, has used its powers in relation to unfair terms widely as part of its supervisory and enforcement activities and we do not see that changing.

The FCA continues to focus on this area and, in particular, insofar as consumer credit providers are currently going through an FCA authorisation process, the FCA is taking the opportunity in many cases to scrutinise their credit agreements for fairness. Fairness of consumer terms will also continue to be a feature of market studies, and we expect the topic to come up in the report due on the credit card market study towards the end of 2015.

The FCA discussion published in July 2014 DP 14/2 (LNB News 07/07/2014 96), set out very clearly the FCA’s approach to fairness in consumer contracts generally (and not just in relation to mortgage contracts). As the FCA settles down into its new structure and wider regulatory role encompassing the comparatively new credit-related regulated activities, we expect it to publish new guidance on the fairness of terms. This could be limited to guidance on CRA 2015 itself or, which we consider to be more likely in light of DP 14/2, could be guidance that takes a broader-brush approach, taking into account firms’ conduct.

Interviewed by Alex Heshmaty.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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