In this article, written for Compliance Monitor, Nicholas Ralph of Dentons looks at how the unfair terms provisions of the CRA may impact financial services firms.
The Consumer Rights Act 2015 (CRA), which received Royal Assent on 26 March 2015, delivers a wholesale overhaul of the UK's consumer rights regime. The CRA consolidates and update various pieces of UK legislation, so that, for the first time, the majority of consumer rights in respect of contracts to provide goods or services are now set out in one place.
Of particular interest to financial services firms are the CRA reforms relating to unfair terms in contracts, replacing provisions currently set out in the Unfair Contract Terms Act 1997 (UCTA) and the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs).
The changes to the law on unfair terms are expected to take effect on 1 October 2015, when most of the CRA comes into force. In this article, Nicholas Ralph of Dentons looks at how the unfair terms provisions of the CRA may impact financial services firms.
What contracts will be subject to the CRA?
Not all contracts will be affected by the CRA; the unfair terms regime only applies to contracts with "consumers"; individuals acting for purposes that are "wholly or mainly outside that person's trade, business, craft or profession"1. However, this is a slight departure from the position under the UTCCRs, which define a consumer as someone acting entirely outside of business.
This change may be of particularly relevance to financial services firms dealing with sole traders and micro-enterprises, where a customer may obtain a benefit under an agreement both as an individual and as part of their business (e.g. a loan to create office space for a small business at their main residential address).
Additionally, a business that claims an individual is not a consumer bears the burden of proving that issue.2 Some of the case law on the definition of a consumer may well need to be revisited by the courts in light of the CRA's slightly wider definition of a consumer.
When will consumer contracts be subject to the CRA?
While no transitional provisions have been published, we expect that the provisions of the CRA dealing with unfair terms will automatically apply to all consumer contracts subsisting at the time the unfair times sections of the CRA are brought into force (currently expected to be October 2015), as well as all new consumer contracts entered into after that date.
Changes to unfair terms law
The law on unfair terms in contracts is currently primarily contained in two pieces of UK legislation: UCTA, which deals with terms in contracts which attempt to limit or exclude liability for negligence or breach of contract, and the UTCCRs, which deal more generally with the fairness of contracts between businesses and consumers.
The UTCCRs are repealed entirely by the CRA, whilst UCTA is heavily reduced and amended so as to deal only with business to business (rather than consumer) contracts. All of the UCTA and UTCCRs provisions dealing with unfair terms in consumer contracts are now contained in the CRA.
Same strategy, wider scope
Broadly, the aim of both the new CRA and the current UTCCRs/UCTA regimes is to render unenforceable various contractual terms that are regarded as unfair (or, in the language of UCTA, unreasonable). Typically, a consumer will seek to argue that a term is unfair where it relates to the payment of sums owing under a loan or other credit agreement, or where it otherwise gives rise to a liability to pay a financial services firm. Where a court finds a term to be unfair, it cannot be enforced against the consumer.
The basic strategy for both the courts and the FCA in considering whether a term is unfair under both the current and the new CRA regimes remains the same: initially they will decide whether a term is of a sort that should be assessed for fairness. If a term is capable of being so assessed, this is followed by an assessment for fairness itself. If a term is then assessed as unfair, the term may not be relied on by the firm which imposed it on a customer.
Additionally, the Financial Conduct Authority (FCA) may review agreements covering particular products or services, and require firms to amend their standard contractual documentation so that unfair terms are removed, and will usually publish a notice announcing its findings, highlighting the name of the particular firm that has unfair agreement terms, and detailing the corrective action...