What's in a name? CRA 2015: the overhaul of the consumer rights regime in the UK

The Consumer Rights Act 2015 (CRA) is in force from 1 October 2015 and in this briefing we take a look at whether it actually brings with it any changes for financial services firms or whether it is just a rebranding of the existing regime.

Consumer protection is headline grabbing; the recent misselling scandals (PPI and interest rate hedging products to name but two) highlighting the media interest which it creates. This is not limited to the provision of financial services; anything that the media deems to be to a consumer's detriment can generate some serious column inches. This has meant that consumer protection has been high on the Government's agenda.

In a preamble to a policy paper on consumer protection, BIS stated that:

"Consumers who are well-informed about their rights and what they're buying are more confident. This means that they are more likely to spend money well by getting better deals or buying new goods and services. This rewards those businesses who are good at responding to what consumers want and helps stimulate growth. […] The government wants to give consumers more confidence – and legal back-up – to deal with bad service or shoddy goods. Through clear, modern legislation, we also want to help consumers and their advocates have a better understanding of their rights."

It was with this in mind that the Consumer Rights Act was enacted. But is it just a publicity exercise to educate consumers about their rights and so bring errant traders into line? Or does it represent a sea change for all involved in selling goods and services to consumers?

Key changes

The CRA applies to all contracts and "notices" between "traders" and "consumers". The term "trader" will catch financial services firms while "consumers" will likely catch financial services firms' retail clients, where they are individuals. Contracts to which the CRA applies will be governed by the CRA from 1 October 2015, rather than previous legislation such as the Unfair Contract Terms Act 1977 (UCTA) and the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRS), and the existing regime will continue to apply to any contracts entered into before this date.

The CRA also intends to improve transparency and so now requires all written terms offered to consumers to be "transparent" and clearly written, i.e. terms should be in "plain and intelligible" language. Although this should be nothing new for financial services firms, with a similar position long taken by the FCA in relation to financial promotions, this may be a new approach for firms with regard to their (often lengthy and complex) terms of business.

A major change that will affect financial services firms is the status of voluntary statements. Statements made voluntarily that are taken into consideration by the consumer when deciding whether to enter into a contract will now form part of the contract between the parties. This means that oral statements made by sales teams and financial promotions may become contractual statements. So-called "entire agreement clauses", therefore, will be unlikely to hold up any longer in court, as pre-contractual statements and notices cannot be excluded from the contract.

ACTION:

As a result of these changes, financial services firms should review their financial promotions, website information, client announcements and communications, as well as terms of business, to ensure that they are fair and transparent and comply with the CRA, and that there is consistency between them.

ACTION:

Oral communications are also caught under the definition of a "notice", which would catch, for example, a relationship manager describing a new type of account or service to a client.

Firms should therefore also consider providing specific training to front-office staff on communicating with consumers and the implications of the new rules.

New definition

Not all contracts are covered by the CRA. It only applies to contracts with consumers, not business-tobusiness contracts, but the CRA widens the definition of consumer to cover "an individual acting for purposes which are wholly or mainly outside of that individual's trade, business or profession", whereas previously the individual had to be acting for purposes entirely outside their business.

This is likely to be particularly relevant to those financial services firms who provide services to individuals where the individual obtains a benefit in a personal and professional capacity; for example, a loan to buy a vehicle which is used for business and private purposes.

Traders, or service providers, will bear the burden of proof to show that an individual is not a consumer if asserting that the CRA does not apply.

Fairness

The CRA largely replaces the reasonableness test in UCTA with the UTCCRS' test of fairness, providing that "a term is unfair if, contrary to the requirement of good faith, it causes a significant imbalance on the parties' rights and obligations under the contract to the detriment of the consumer".

It goes on to state that this will be determined taking into account the nature of the subject matter of the contract and by reference to all the circumstances existing when the term was agreed. For financial services firms this is important – financial services contracts are often complex, not concluded face to face, and within a short period of time. All of this will be taken into account on any assessment of fairness.

Negotiated terms

Under the CRA, negotiated terms are covered in all circumstances whereas, previously, these were specifically carved out from the UTCCRS (but may have been caught by UCTA). This means that the CRA applies to all business-to-consumer contract terms, whether or not terms have been individually negotiated with the consumer. It will be important for firms to bear this in mind when agreeing to any bespoke terms with consumers and for fairness to be considered during the course of negotiations.

New obligation on the courts

Section 71 of the CRA provides an express requirement that courts must review a term of a consumer contract for fairness. Provided that the court considers that it has sufficient legal and factual material to consider the fairness of the term, the court must consider whether the term is fair, even if none of the parties has raised the issue of fairness.

This is a major development and a significant departure from the old regime. The position reflects the European Court of Justice (ECJ) decision in Pannon GSM Zrt -v- Erzsébet Sustikné Győrfi (Case C-243/08). The ECJ decided that courts must review a term for fairness even if the point of fairness is not raised by the consumer.

The CRA has applied the ECJ's approach in Győrfi to its provisions on unfair contract terms. This will have a significant impact on consumers, especially those with no legal representation, and no doubt on the UK courts in terms of training and resource as all civil court judges will need to be fully conversant in its provisions and ready and able to recognise terms which fall within this new duty.

Terms regarding the main subject of the contract or price

Terms specifying the main subject of the contract or terms setting out the price are not subject to the fairness test, provided that they are both transparent and prominent. Existing legislation only requires the relevant term to be transparent. Consideration will need to be given to how this is achieved whether, for example, by moving such terms to the beginning of terms of business or providing a separate key information sheet with this information clearly set out.

"Grey list" of indicative unfair terms

The CRA carries over from the UTCCRS the "grey list" of indicative terms which may be unfair and adds further categories as follows:

• Disproportionately high exit fees
  In practice, the FCA has already issued guidance which states that terms which impose exit fees on customers which are disproportionate and effectively prevent them terminating the contract, and thereby representing a barrier to exit, are likely to be unfair. Such fees should not be imposed at all where a customer terminates due to action taken by a firm (for example, a change in interest rates), and where a customer terminates of their own volition should be kept to a minimum, at most representing the genuine cost to the firm of terminating. This is in addition to the rights which a customer may already have to terminate without charge; for example, under the cooling-off period provide by the Financial Services (Distance Marketing) Regulations 2004.
• Allowing the trader discretion to determine the characteristics of the subject matter of the contract after the consumer is bound
  Terms of business should clearly, in easily understood language, set out exactly what the consumer is getting and when, and should not be determinable by the firm at some later date. If a change in circumstances (for example, a change in market conditions or regulatory environment) means that the subject matter of the contract which will be provided is different to that agreed, this should be separately agreed with the consumer, and firms should not assume that they can determine it in their discretion.
• Allowing the trader discretion to determine the price payable under the contract after the consumer is bound
  Price transparency is key. Consumers should know in advance what they are getting and what they are paying for it, and this should be easy to understand and not, for example, determinable by reference to some difficult-to-calculate formula.

This is particularly important for financial services firms where unexpected fees or charges may arise.

ACTION:

Where possible, financial services firms should agree fees or charges with consumers before they are incurred and the possibility that they may arise should be prominently noted in terms of business or on fee cards.

While there is an exclusion from this "grey list" item for contracts for the transfer of "transferable securities, financial instruments and other products or services where the price is linked to fluctuations in a stock exchange quotation or index or a financial market rate that the trader does not control" or for the purchase of foreign currency, this does not mean that firms can be complacent about their own charges and should make it clear what their own fees are and that the price for such contracts will depend on certain specified conditions.

Status of voluntary statements by a service provider

As noted above, a service provider is contractually liable for any statements which it makes voluntarily and which are taken into consideration by the consumer under the new rules. The impact of this is that consumer notices, such as financial promotions, will be considered part of the contract and this will be particularly important where notices contain information which is at odds with terms of business.

ACTION:

Financial services firms will need to consider more carefully how consumer notices are drafted in light of the CRA requirements.

New ban on liability exclusion and limitation

Excluding liability for failure to perform a service with reasonable care and skill is now banned by the CRA. The CRA has also set a ban on traders limiting their liability to less than the price paid. If a trader breaches its duty to provide services with reasonable skill or does not provide its services in accordance with the information provided to the consumer, the consumer is entitled to repeat performance or a price reduction for the service.

What of the FCA?

The FCA addressed the CRA in its Quarterly Consultation (No. 9) of June 2015, where it proposed to amend the rules and guidance provisions in the FCA Handbook as well as the Enforcement Guide and the Unfair Contract Terms Regulatory Guide. The consultation closed on 5 July 2015.

The proposed changes to the Enforcement Guide will include the FCA's new powers under schedule 3 of the CRA, which sets out that the FCA has powers to apply for injunctions in relation to contract terms that are unfair, non-transparent and/or exclusionary or restrictive in terms of liabilities. In practice, however, the FCA (and previously the FSA) has previously required financial services firms to give undertakings not to rely on terms which it considers to be unfair, so it is unlikely that such powers will be necessary other than in exceptional circumstances.

Other than that, however, the FCA has been silent on its view of the impact of the CRA. It is interesting to note that the FCA has removed a majority of the undertakings in its unfair contract terms library and several guidance documents and papers related to unfair terms. The FCA stated that it has removed these materials in order to consider how they should be updated in light of the CRA and because it "no longer reflects the FCA's views on unfair contract terms. Accordingly, firms should not rely on the content of those documents".

This suggests that there may be a departure from the way unfair terms were previously viewed by the FCA and leaves financial services firms and their legal advisers in something of a legal limbo, with no indication from the FCA as to how it expects firms to react to the CRA or reflect it in their terms and other customer communications.

For now, firms are left with the previous FCA guidance and to take their own views on fairness, but with an eye always towards what the regulator would consider to be "treating customers fairly".

The Competition and Markets Authority has, however, as the lead enforcer of the CRA, published guidance which sets out its interpretation of the provisions and which is the Government's main guidance on unfair terms once the CRA comes into force. In summary, it states that terms and conditions used by businesses should be fair, not be weighted in the businesses' favour, not be hidden, use plain language and allow consumers to make informed choices about what is being provided.

The guidance defines the average consumer as one who is "reasonably well-informed, observant and circumspect". The guidance is clear that a consumer must be placed in a position where they can fully understand the agreement they are entering into.

The guidance includes examples of blacklisted terms which will automatically be deemed to be unfair (there is no departure here from the existing regime), and an explanation of "grey-listed" terms which are potentially, but not automatically, unfair (as discussed above).

Conclusion

While the CRA has a much wider ambit than financial services dealings, the impact on this industry may be quite considerable. Most firms who deal with retail customers will have already undertaken a substantial review of their terms of business and all customer communications of whatever form in light of the new legislation, attempting to mesh the requirements of "fairness" with the commercial pressures of running a successful business.

There is a high probability that more consumers are likely to be aware of their rights, the CRA's introduction having been given some press coverage and this, with the new obligation on courts to consider issues of fairness as a matter of course rather than just at the instigation of a party, is likely to ramp up the level of scrutiny that terms of business come under. Firms should be prepared to proactively make changes to their terms following regulatory pronouncements or enforcement action, as well as where courts make any specific determinations in relation to the fairness of their own terms.

Financial services firms will need to bear all of these provisions in mind, in addition to current FCA and other financial legislation (for example, the FCA rules on financial promotions in COBS 4 and those rules in relation to consumer credit which already prescribe certain information which must be provided to consumers). Compliance with one regime will not equal compliance with all. Firms will need to consider all rules and regimes in the round, rather than piecemeal or in isolation, to achieve a joined-up approach to compliance across the board.