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FSA/PN/051/2005
19 May 2005

The Financial Services Authority today set out the standards it expects regulated financial services firms to meet when writing contracts for their products and services. The watchdog has issued a Statement of Good Practice about fairness of contract terms as part of its work to help retail customers achieve a fair deal, one of its three business priorities.

One area of particular concern is contracts which give a firm unilateral power to vary charges after the contract has been signed, so-called "variation clauses". These often apply to interest rates on savings and deposit accounts and residential mortgages, and to premiums for certain life and long term health insurance contracts such as critical illness and long term care policies.

Anna Bradley, FSA Director Retail Themes, said:

"Contracts define the terms of the deals customers get, but for the most part customers have no influence over what goes into them. The law requires firms to use contract terms that are fair and our Statement sets out how firms might go about achieving this.  

Being fair is all about getting the right balance between the firm and the consumer. For example the power to vary insurance premiums in long-term health contracts is not inherently unfair and consumers may benefit from a lower premium. But the contract cannot be so one-sided that the firm can then do as it pleases when it is reviewed. When first taking out the contract consumers need to know the reasons why the premium charged might change and whether and when they will be told about that change.

Where we have considered a term to be unfair, we have obtained an undertaking from the firm to cease to apply the term and to amend it for the future, and we have then published that undertaking on our website."

The Statement has been produced in the context of the FSA’s role as Qualifying Body (enforcement authority) for financial services firms under the Unfair Contract Terms Regulations. In keeping with the FSA's preference for principles-based regulation, it does not introduce any new rules.  

Notes to editors

1. The Unfair Terms in Consumer Contracts Regulations apply to standard form consumer contracts which have not been individually negotiated with consumers. They apply to contracts entered into since 1 July 1995 and protect consumers against abuse by firms of the power that one-sided standard form contracts may give firms by making unfair terms unenforceable.
2. Fairness of Terms in Consumer Contracts: Statement of Good Practice is addressed to firms regulated by the FSA. However, it is also of interest to consumers for the attention it draws to the protections that are given to them by the Regulations and what they need to look out for when signing contracts. We will shortly incorporate the Statement into our web pages dealing with the Regulations and on which we publish the undertakings we are given by firms to amend their contract terms so that they are fair.
3. The FSA will shortly be inviting industry and consumer representatives to a round table to review the effect of the Statement and the practical issues arising from it.
4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
5. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal, and improve its business capability and effectiveness.