Unfair Terms

Posted on Tuesday 23rd November 2010

The FSA has issued guidance affirming the relevance to financial advice and products of the Unfair Terms Consumer Contract Regulations of 1999.  This guide was issued in connection with the penalties taken by some mortgage companies when a borrower terminates a mortgage arrangement early (i.e. repays his loan). 

But these regulations are very interesting and important in the context of financial services generally.  They are in fact a bit of European law imported into UK law in 1999.  They are not as well known to the public as they should be.  Very simply drafted in easy to read language they say that an unfair contract term is not enforceable against a consumer.  An unfair contract term is one which ?contrary to the requirement of good faith, causes a significant imbalance in the party?s rights and obligations under the contract, to the detriment of the consumer?.  It only applies between a commercial seller of goods or supplier of services and a consumer.

In the context of mortgages, this advice is timely because lenders have been imposing penalties on early repayment of mortgages to cover things like the cost of arranging the mortgage, the cost of running the mortgage account, the loss of profit on lending, loss of interest and the cost of marketing etc. 

None of these should be recoverable.  What is recoverable are extra costs caused by the exit from the contract and these should be justified.

These rules are consistent with a very long line of English common law cases which are to the effect that the law does not like a penalty being agreed in a private contract.  Penalties, including awards of damages, are for the judges and not for one party to bully another one to agree at the time of entering into the contract.

I regret to say I do not believe these regulations apply to market value adjusters imposed in With Profit contracts but they could apply to some contracts where the benefits are all one way and the risks all another. 

They can similarly be applied to standard form agreements where the consumer is induced to agree at the outset that he has read all the terms and conditions of the contract and understands everything.  That may be quite an unreasonable thing to make the consumer agree to, especially if the contract such as a pension plan or an insurance bond, is necessarily complex.