• Doing business with the FSA
  • Being regulated
    • Unfair contract terms
      • What the Regulations do

The Regulations implement the European Directive on Unfair Contracts 1993. To protect consumers, they set out the definition of an unfair term as 'a contractual term which has not been individually negotiated shall be regarded as unfair if, contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations arising under the contract, to the detriment of the consumer…' [Regulation 5(1)]

The Regulations

The Unfair Terms in Consumer Contracts Regulations apply to standard form contract terms which have not been individually negotiated with consumers. 'Consumer' is defined in the Regulations as 'any natural person who, in contracts covered by these Regulations, is acting for purposes which are outside his trade, business or profession'. The Regulations apply to contracts entered into since 1 July 1995 and make unfair terms unenforceable against the consumer.

Regulation 6

Regulation 6 provides that the fairness of a contract term 'shall be assessed, taking into account the nature of the goods or services for which the contract was concluded and by referring, at the time of conclusion of the contract, to all the circumstances attending the conclusion of the contract and to all the other terms of the contract or of another contract on which it is dependent'.

Regulation 7

Regulation 7 states that a firm 'shall ensure that any written term of a contract is expressed in plain, intelligible language' and 'if there is doubt about the meaning of a written term, the interpretation which is most favourable to the consumer shall prevail..' .

Schedule 2

Schedule 2 to the Regulations sets out an 'indicative and non-exhaustive list of terms which may be regarded as unfair'. An example in Schedule 2 of a term that may be unfair is one which enables the firm unilaterally to change the terms of the contract without a valid reason specified in the contract. Terms of this kind give firms significant power to alter their agreement with consumers by changing an element of the contract such as price, interest rate or insurance premium. In our Statement of Good Practice, we refer to such elements as 'contract variables'.

Schedule 2 suggests that terms which enable a firm unilaterally to change contract variables are less likely to be unfair if:

1. the term enables the firm to change a contract variable only with a valid reason which is specified in the contract; or
2. the term permits a change in the rate of interest or other charges for financial services under the contract only if there is a valid reason (which is not specified in the contract) for that change and the contract provides for the firm to give the consumer notice at the earliest opportunity thereafter (rather than in advance), and the consumer is free to dissolve the contract immediately; or
3. if, in a contract of indeterminate duration, the contract provides for the firm to give the consumer reasonable notice in advance of making the change and the consumer is free to dissolve the contract.

We have gone into more depth on these types of term in our Statement of Good Practice. More examples are given in the section What unfair terms look like.

Exemptions

There are some exemptions from the Regulations for which firms should refer directly to the 1999 Statutory Instrument (see right) and our Statement of Good Practice. Chief among these is the 'core terms' exemption.

A core term in a contract is not generally reviewable for fairness under the Regulations, provided it is in 'plain, intelligible language' (Regulation 7). Core terms are generally those which define the main subject matter of the contract (such as the goods or services to be supplied) or which relate to the adequacy of the price or remuneration as against the goods or services supplied. Ultimately, whether a term is a core term or not is a matter for the Courts.

However, in our view, for example neither an interest rate variation clause nor a premium review clause is a core term within the meaning of the Regulations because each relates to varying the price rather than setting the initial price. As we are not an economic regulator, the price of a product or service is not something that we would normally address. But we will consider whether firms have met their wider obligations to treat consumers fairly in the way they operate price variation clauses.