1This chapter explains the FSA's policy on how it will use its powers under the Unfair Terms Regulations.

The FSA has agreed with the Office of Fair Trading that the FSA will consider the fairness within the meaning of the Unfair Terms Regulation of financial services contracts for carrying on:

1. (1)

   any regulated activity;

2. (2)

   general insurance, including broking;

3. (3)

   lending, administration, advising and arranging in respect of mortgages where the lender takes a first legal charge over property in the United Kingdom and the property is at least 40% occupied by the borrower or by a member of his immediate family

The Office of Fair Trading will consider the fairness within the meaning of the Unfair Terms Regulations of other financial services contracts involving carrying on activities governed by the Consumer Credit Act 1974, including second charge mortgage loans, buy to let mortgages, and non-mortgage personal loans (including credit cards). Further, where the firm concerned is not a firm or an appointed representative, the Office of Fair Trading may take enforcement action under the Unfair Terms Regulations in respect of financial services contracts involving the carrying on of activities within ENF 20.1.2 G (see ENF 20.4.6 G (5) and (6)).

This chapter therefore applies to:

1. (1)

   firms;

2. (2)

   appointed representatives; and

3. (3)

   other persons, whether or not a person with permission, who are using, or recommending the use of contracts, for carrying on the activities set out in ENF 20.1.2 G.

This chapter uses 'firm' to refer to all persons covered by ENF 20.1.4 G.

This chapter contains guidance on the FSA's formal powers under the Unfair Terms Regulations. This chapter does not contain comprehensive guidance on the Regulations, and the reader should refer to the Regulations themselves for further details.

This chapter also gives guidance on the approach the FSA expects to take before considering whether to exercise its formal powers under the Unfair Terms Regulations.

The FSA has powers as a qualifying body under the Unfair Terms Regulations. The Regulations are not made under the Act. However, the Regulations say that the FSA's functions under the Regulations are treated as functions under the Act. This:

1. (1)

   makes the regulatory objectives relevant to the formulation of policy governing the discharge of the FSA's functions under the Regulations;

2. (2)

   means that any complaints about the FSA's activities under the Regulations can be referred to the Complaints Commissioner;

3. (3)

   allows the FSA to make full use of its information disclosure powers;

4. (4)

   allows the FSA to use its power to give guidance;

5. (5)

   protects the FSA against liability in damages in respect of its activities under the Regulations; and

6. (6)

   allows the FSA to raise fees to fund its activities under the Regulations.

The FSA will publish on its Internet site details of cases that result, through either an undertaking by a firm or injunction obtained from the courts, in a change in the contract terms used by it. The name of the firm will be included. Additionally, the Office of Fair Trading publishes similar details of cases that it and other qualifying bodies have dealt with in accordance with their duties under regulation 15 of the Unfair Terms Regulations. The FSA may therefore pass such details of cases to the Office of Fair Trading for publication on the Office of Fair Trading Internet site.

1. (1)

   The Unfair Terms Regulations apply, with certain exceptions, to terms in contracts concluded between a seller or supplier and a consumer which have not been individually negotiated.

2. (2)

   Terms cannot be reviewed for fairness within the meaning of the Unfair Terms Regulations if they are terms which reflect:

   1. (a)

      mandatory statutory or regulatory provisions; or

   2. (b)

      the provisions or principles of international conventions to which the EEA States or the European Community as a whole are party.

3. (3)

   Terms which are written in plain, intelligible language also cannot be reviewed for fairness within the meaning of the Regulations if they relate to the main subject matter of the contract or the adequacy of the price or remuneration, as against the goods or services supplied in exchange. However, the FSA can review terms concerning these matters for fairness within the meaning of the Regulations if they are not written in plain, intelligible language. The FSA does not consider that it is enough that a lawyer could understand the term for the term to be excluded from review for fairness within the meaning of the Regulations. The term must be plain and intelligible to the consumer.

Terms to which the Unfair Terms Regulations apply are regarded as unfair if, contrary to the requirement of good faith, they cause a significant imbalance in the parties rights and obligations to the detriment of the consumer.

1. (1)

   Regulation 12 of the Unfair Terms Regulations states that: '(1) The [Office of Fair Trading] or [...] any qualifying body may apply for an injunction (including an interim injunction) against any person appearing to them to be using, or recommending the use of an unfair term drawn up for general use in contracts concluded with consumers'.'(3) The court, on an application under this regulation, may grant an injunction on such terms as it thinks fit.'

2. (2)

   The FSA is a qualifying body for the purposes of regulation 12.

1. (1)

   In deciding whether to grant an injunction, the court will decide whether the term in question is unfair within the meaning of the Unfair Terms Regulations (see ENF 20.3.2 G).

2. (2)

   If the court were to grant an injunction, the seller or supplier or recommender would have to stop including the unfair term in contracts it concluded with consumers from the date of the injunction

3. (3)

   If the seller or supplier or recommender fails to comply with the injunction, it will be in contempt of court

The FSA also has the power under regulation 13 of the Unfair Terms Regulations to require for certain purposes that the seller or supplier or recommender supply the FSA with certain information or documents relating to pre-formulated standard contracts.

If the court finds that the term in question is unfair, the seller or supplier or recommender would also have to stop relying on the unfair term in existing contracts governed by the Unfair Terms Regulations. This is because regulation 8 of the Regulations provides that an unfair term is not binding on the consumer. To the extent that it is possible, the existing contracts would continue in effect without the unfair term.

The FSA may consider the fairness of a contract within the meaning of the Unfair Terms Regulations following a complaint from a consumer or other person or on its own initiative if the contract is within its scope according to ENF 20.1.2 G.

There are three main ways in which the FSA might receive a complaint from a consumer or other person. These are:

1. (1)

   directly; or

2. (2)

   from another qualifying body which considers that the FSA should deal with the complaint; or

3. (3)

   from the Office of Fair Trading.

1. (1)

   The principal way in which the FSA would act on its own initiative is to undertake a review of contracts in a particular area of business on its own initiative. This might involve investigating the contract terms used by several firms in a particular sector, rather than waiting for complaints regarding a particular firm.

2. (2)

   The FSA will, for example, consider launching such a review if multiple consumer contract complaints or other intelligence lead it to believe that under the Unfair Terms Regulations there may be a contractual issue of wider significance to firms and consumers.

If, following either a complaint or an own-initiative review, the FSA considers that a term in a contract which is within its scope as described in ENF 20.1.2 G is unfair within the meaning of the Unfair Terms Regulations, it may challenge firms regarding their use of the term, as described in ENF 20.4.6 G.

1. (1)

   The FSA will consider using its functions under the Unfair Terms Regulations in the context of its wider regulatory powers under the Act.

2. (2)

   In some cases, it might be appropriate to use other powers to deal with issues identified under the Unfair Terms Regulations. The powers available to the FSA under the Act may vary depending on the regulated activities, if any, which the firm carries on (see ENF 20.1.2 G). For example, the use of the unfair term might involve a breach of a rule in COB, and, if so, it would also be open to the FSA to address the issue as a rule breach.

3. (3)

   The FSA may, in some circumstances, consider treating the matter under its powers in the Act and under the Unfair Terms Regulations.

4. (4)

   The use of powers under the Act will not be possible in all cases in which a firm uses an unfair term. If the FSA is considering using an enforcement power under the Act, it will do so in accordance with the policy relating to that power as set out in ENF.

1. (1)

   If the FSA decides to address issues using its powers under the Unfair Terms Regulations, and the contract is within its scope as described in ENF 20.1.2 G, it will, unless the case is urgent, generally first write to a firm expressing its concerns about the potential unfairness within the meaning of the Unfair Terms Regulations of a term or terms in its contract and inviting the firm's comments on those concerns. If the FSA remains of the view that the term is unfair within the meaning of the Unfair Terms Regulations, it will normally ask the firm to undertake to stop including the term in new contracts and stop relying on it in contracts which have been concluded.

2. (2)

   If the firm either declines to give an undertaking described in (1), or gives such an undertaking and fails to follow it, the FSA will consider the need to apply to court for an injunction under regulation 12 of the Unfair Terms Regulations, described in ENF 20.3.3 G.

3. (3)

   In determining whether to seek an injunction against a firm, the FSA will consider the full circumstances of each case. A number of factors may be relevant for this purpose. The following list is not exhaustive; not all of the factors may be relevant in a particular case, and there may be other factors that are relevant:

   1. (a)

      whether the FSA is satisfied that the contract term which is the subject of the complaint may properly be regarded as unfair within the meaning of the Unfair Terms Regulations;

   2. (b)

      the extent and nature of the detriment to consumers resulting from the term or the potential detriment which could result from the term;

   3. (c)

      whether the firm has fully cooperated with the FSA in resolving the FSA's concerns about the fairness of the particular contract term;

   4. (d)

      the likelihood of success of an application for an injunction;

   5. (e)

      the costs the FSA would incur in applying for and enforcing an injunction and the benefits that would result from that action; the FSA is more likely to be satisfied that an application is appropriate where an injunction would not only prevent the continued use of the particular contract term, but would also be likely to prevent the use or continued use of similar terms, or terms having the same effect, used or recommended by other firms concluding contracts with consumers.

4. (4)

   In an urgent case, the FSA may seek a temporary injunction, to prevent the continued use of the term until the fairness of the term could be fully considered by the court. An urgent case is one in which the FSA considers that the actual or potential detriment is so serious that urgent action is necessary. In deciding whether to apply for a temporary injunction, the FSA may take into account a number of factors, including one or more of the factors set out in (3). In such an urgent case, the FSA may seek a temporary injunction without consulting with the firm in the manner described in (1).

5. (5)

   When the FSA considers that a case requires enforcement action under the Unfair Terms Regulations, it will take the enforcement action itself if the firm is a firm or an appointed representative.

6. (6)

   Where the firm is not a firm or an appointed representative (see ENF 20.1.4 G(3)), the FSA will pass the case to the Office of Fair Trading, with a recommendation that it take the enforcement action. The Office of Fair Trading may then decide whether or not to take enforcement action.

1. (1)

   Where a firm has given an undertaking as described in ENF 20.4.6 G (1), or a court has ruled the firm's term unfair, then the FSA considers it desirable that the firm should notify promptly clients with whom it has already concluded contracts of the effect on their contracts.

2. (2)

   The firm should also, as part of its risk management, consider the effect on its own business, including whether there are relevant risks requiring mitigation. This may involve the firm contacting existing customers in due course to request that they agree to an amended contract, though such amendments will themselves need to avoid unfairness within the meaning of the Unfair Terms Regulations and comply with the law of contract generally.

3. (3)

   As part of their risk management, firms that have not themselves given an undertaking or been subject to a court decision should remain alert to undertakings or court decisions concerning other firms, since these will be of potential value in indicating the likely attitude of the courts, the FSA, the Office of Fair Trading or other qualifying bodies to similar terms or terms with similar effects.

1. (1)

   The FSA does not have the power under the Unfair Terms Regulations to grant redress to consumers who have suffered loss as a result of an unfair term. Consumers may choose to complain to the firm and to seek redress from it. If the firm does not satisfy the consumer's complaint, the consumer may choose to refer the complaint to the Financial Ombudsman Service, if appropriate.

2. (2)

   If the use of an unfair term also amounts to a rule breach (see ENF 20.4.5 G (2)) and that breach causes loss to consumers, the FSA can apply to court for restitution or require restitution. The FSA will consider whether to use these powers in accordance with the policy in ENF 9 (Restitution and redress).