Under the Consumer Rights Act 2015, the terms of firms’ contracts must be fair and transparent. Where the FCA considers changes to clauses in a contract to be unfair or lacking in transparency, it can take action.
While this area is not new, the regulator’s proposals are a step in clarifying and standardising previous guidance and also reflects current legislation and case law.
The FCA has set out the following guidance for financial services firms in relation to the fairness of variation in terms, usually found in contracts with a long or indeterminate duration, including current accounts, personal pensions, mortgage or credit card agreements:
- The validity of the reason(s) for varying a term;
- The transparency of the variation term;
- Provision for notice in the variation term;
- Give consumers the freedom to exit a contract if they do not want to accept the variation.
Risks consumer harm
Consultation documents stated: “We want to make our view clear on the appropriate way to assess the fairness of variation terms.
“We acknowledge the benefit of fair variation terms to firms and consumers, because they allow contracts to be changed in their lifetime, making them more available to consumers.
“For example, the scope to change variable rate contracts allows firms to offer competitively-priced products that go beyond ones that track base rate, therefore offering greater choice to consumers.
“This is because firms know they may vary the interest rates they charge to reflect changes in circumstances, particularly changes in firms’ own costs of funding. However, appropriate drafting is required as an unfair variation term is not binding on the consumer and also risks causing consumer harm through unfair use.”