• Doing business with the FSA
  • Being regulated
    • Unfair contract terms
      • What unfair and fair terms look like

Unfair terms

Here are some generic examples of terms that may be unfair. However, just because a term looks like one of these examples does not necessarily mean that it is in fact unfair – that will depend on the precise details of the contract as a whole.

If you are a firm, these could be terms that:

• charge your customers a disproportionately large sum if they do not fulfil any of their obligations under the contract, or if they cancel the contract – e.g. these could be the sort of terms that apply when a consumer does not pay a premium or loan repayment on time or goes overdrawn on their account;

• tie your customers into the contract but let you decide whether to provide the service;

• allow you to change important parts of the service you have agreed to provide to your customers without their agreement, unless this is for a valid reason specified in the contract– e.g. premium review clauses, variable charges or variable interest rates, for more see our Fairness in Consumer Contracts: Statement of Good Practice;

• give you the absolute right to decide if your products or services have met the requirements under the contract, or to interpret any term of the contract as you see fit;

• make the customers fulfil all their contractual obligations while letting you avoid your own;

• automatically extend a fixed-length contract unless the customer states they do not want to extend it, and where the deadline within which the customers have to state this is unreasonably short – e.g. these could apply to some renewable insurance contracts;

• limit your obligations to honour your agents’ commitments to the customer – e.g. 'whole agreement' clauses';

• allow you to transfer your obligations to the customer to a third party without the customer's consent, even where this may be worse for the customer;

• tie the customer into the contract, even if they have not had a real opportunity to understand the terms before they sign it;

• mislead the customer about the contract or their legal rights; and/or

• exclude or limit the customer's legal rights or remedies when you have failed to meet your obligations under the contract – e.g. when you fail to provide the service that you agreed to provide.

Fair terms

There are four key messages to focus on.

• Firms should take into account consumers' legitimate interests in relation to contracts over which they have had no influence, but to which they will nonetheless be bound.
• Fairness is not contrary to the prudent management of the business, but part of it.
• Dwelling on narrow technical arguments to justify a contract term that, in fact, may be unfair risks future challenge.
• The fact that, for example, a variation clause does not offend any of the terms listed in Schedule 2 to the Regulations may not, of itself, remove the risk of unfairness altogether. Firms need to assess whether a term is fair using the Regulations as a whole and in the context of the particular product or service.

The test of fairness includes the need for firms to take into account consumers' legitimate interests in the context of the inequality of bargaining power between a firm and its consumers. This is important, for example, to a firm in deciding on the extent of any discretion it will reserve for itself at the time when drafting a standard form contract. If a firm retains extensive and/or open-ended discretion on if, when and how it changes a contract variable, this may indicate a failure to take into account the consumer's legitimate interests. So this may make the term(s) unfair.