global insurance management

Unfair Contract Terms


Oct 02 2013

Unfair Contract Terms

Relevance:                   All regulated firms.

Action required:           Make sure the terms your firm uses in business documents will not be considered as “unfair”.

You may have read recently about the trouble that a well known insurer got into concerning some terms in its home and car insurance policies.  The FCA intervened because of its responsibilities under the Unfair Terms in Consumer Contracts Regulations 1999 (the Regulations).

Specifically, the FCA considered the terms to be unfair because:

  • Policy documents contained cancellation terms that allowed it to cancel a consumer's home or car insurance policy at any time, with seven days’ notice in writing, without the firm having to explain why it had done this. The policy documents only specified customers missing a premium payment as grounds for a potential cancellation. Also, both policies contained terms that allowed the firm to cancel the policy and charge an administration fee if a customer missed a premium payment, irrespective of why this had happened.
  • In our view these terms meant that without good reason consumers could be left uninsured and perhaps find it difficult to arrange insurance elsewhere following a potentially unjustified cancellation.
  • We also considered that, in situations where a consumer's direct debit may fail for reasons outside their control, it would be disproportionate to cancel the policy if the consumer could easily rectify the situation if given the chance.
  • The insurer also acknowledged that its automatic renewal terms were unclear.

While this matter refers to terms in a policy document, the Regulations cover far more than that.

The Office of Fair Trading (OFT) is the principal enforcer of the Regulations and the FCA is a ‘qualifying body’ under the Regulations, which means that it has powers to tackle unfair terms.

By agreement with the OFT, the FCA is responsible for considering the fairness (within the meaning of the Regulations) of standard terms in financial services contracts issued by FCA authorised firms or appointed representatives of firms that undertake any regulated activity.

This means that the FCA is responsible for considering the fairness of terms in many types of financial services contracts, including those relating to:

  • mortgages;
  • general insurance;
  • bank, building society and credit union savings accounts;
  • life assurance;
  • pensions;
  • investments; and
  • long-term savings.

If the FCA considers a contract term to be unfair under the Regulations, they can ask a firm to give an ‘undertaking’ that it will stop using the term in its contracts.  The “esure” undertaking is available for reading at the following link: http://www.fca.org.uk/your-fca/documents/undertakings/undertaking-esure-insurance-ltd

At the same time, there is the ongoing reference to TCF.

If they think a term is fair and expressed in plain intelligible language, they will not challenge it under the Regulations.  However, firms should remember their wider obligation to treat their customers fairly. The FCA expect firms not to rely on narrow and technical interpretations of the Regulations to justify a contract term that may be unfair in the wider context and thus open to challenge.

So, terms in documents that are issued to consumers should not be “unfair”.  You may not be able to influence those issued by insurers but you can make sure that your own documents do not fail scrutiny under the Unfair Terms in Consumer Contracts Regulations 1999.

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