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FCA consultation – assessing fairness of variation terms in financial services consumer contracts

FCA consultation – assessing fairness of variation terms in financial services consumer contracts
  • United Kingdom
  • Financial services
  • Financial services - Retail finance


On 17 May 2018 the UK’s Financial Conduct Authority (FCA) launched a consultation on new guidance on the fairness of variation terms in financial services consumer contracts under current legislation and in light of recent case law of the Court of Justice of the European Union (CJEU). Please note that the consultation closes on 7 September 2018.

The draft guidance is found in Annex 2 to the consultation paper. This guidance is highly relevant to financial services providers, as unilateral variation terms are commonly used in financial services consumer contracts, and are often essential to ensure that products can evolve in accordance with changes to legal and regulatory environments and market conditions. This is particularly the case for contracts of long or indeterminate duration, such as current account, personal pension, mortgage or credit card agreements.

Appropriate drafting is required to avoid such terms being deemed unfair by the courts and the regulators, the Consumer Rights Act 2015 (CRA) which replaced the Unfair Terms in Consumer Contracts Regulations (UTCCRs) being the key legislation here. The guidance recognises that the UTCCRs continue to apply to financial services consumer contracts entered into between 1 October 1999 and 30 September 2015.

Here is a summary of some of the key points of the proposed guidance:

Why is the FCA consulting?

As a regulator under the CRA, the FCA has the power to consider the fairness of terms in consumer contracts issued by those companies it regulates.

In March 2015 and May 2016, the FCA withdrew unfair contract terms materials from its website. It has since produced some new guidance which provides limited advice on assessing the fairness of consumer contracts in general, and is now consulting specifically in respect of unilateral variation terms.

The FCA says it has not found any evidence of widespread customer detriment and is not currently planning to take any further action once the finalised guidance has been issued. This is helpful when compared to other business sectors such as higher and further education where the Competition and Markets Authority (CMA) as a regulating body has decided to issue guidance on unfair terms and variation provisions due to concerns based upon actual consumer detriment.

The FCA is currently consulting on unilateral variation terms in particular because:

  • The FCA envisages unilateral variation terms as some of the most complex terms to assess for fairness.
  • The need to clarify the legal principles in recent CJEU case law developments which are relevant to financial services consumer contracts.
  • A large proportion of contract terms referred by consumers to the FCA relate to variation terms.

Whereas the consultation is limited to the draft guidance on the fairness of variation terms, the FCA has announced it may consider producing future guidance on other aspects of the law regarding unfair contract terms.

The guidance is not a substitute for legislation and case law but, once finalised, will be essential reading for firms providing financial services to consumers.

Determining the fairness of variation terms

The proposed guidance contains a useful summary of the key legislation and legal authorities applicable to unilateral variation terms. Such terms appear in the indicatively unfair list of terms included in Part 1 of Schedule 2 to the CRA (the “grey list”). Whilst indicatively unfair, it is possible to have a fair unilateral variation term in a contract if drafted appropriately, especially in long or open-ended contracts. Consequently, the FCA’s approach to unilateral variation terms is that each term should be assessed for fairness on a case-by-case basis.

According to the new proposed guidance, financial institutions should take into account a number of areas when drafting and reviewing variation terms. These include the transparency of the variation term, the validity of the reason for using such term, the notice required, and the customer’s freedom to exit the contract if choosing not to accept the variation.

The consultation seeks views on a non-exhaustive list of factors that the FCA considers relevant when determining the fairness of a variation term. These appear to go beyond the provisions found in the CRA and the UK case law. The 11 factors outlined in the proposed guidance cover some broad themes which have been influenced by the CJEU case law and which we would summarise as:

  • The need for a legitimate objective behind the variation term.
  • The scope and effect of the variation of the term – does it go beyond that necessary to achieve the legitimate objective?
  • Whether or not the term can operate in the consumer’s favour, for example price decreases as well as increases.
  • The transparency of the variation term – not only is the language clear, but are the consequences of the term and its triggers for applying clearly explained to customers? The latter element does raise questions in the context of longer term contracts around the practicality of being able to cater for and foresee future changes in market/economic conditions and the degree of detail around, for example, interest rate setting policies, which is expected.
  • Provision for customers to be given prior notice upon exercise of the variation term is essential.
  • Freedom to exit – can the customer freely terminate the contract (in legal and practical terms) if the variation clause is engaged?
  • Striking a fair balance between the legitimate interests of the firm and the consumer. This can be compared and contrasted to the fairness test in the CRA which requires a “significant imbalance” to the detriment of the consumer.

The proposed guidance also includes the FCA’s views on the validity of some of the reasons commonly cited by firms for varying terms in consumer contracts, commonly to increase the price of fees and charges. In this respect, reasons which relate to matters outside the firm’s control, such as changes in technology, legislative changes and regulatory requirements, or changes to costs of funding, are generally likely to be valid.

By contrast, reasons citing the need to remain competitive – a provision which is commonly seen in terms at present–, and statements that the terms may be varied “for any other reason”, it is suggested in the draft, may be unlikely to be valid, due to lack of transparency.

It is very interesting to note that, whilst the CJEU case law is referred to throughout the consultation paper and influences the positions provided by the FCA, there is no mention of Brexit. This means that the CJEU’s influence on unfair terms in the financial services sector in the UK will survive Brexit should the FCA adopt the consultation guidance as it is presently drafted.


Whilst any guidance from the FCA in this area will provide clarity, the proposed guidance appears to be more consumer friendly than previous guidance and the influence of the CJEU case law is notable, and we envisage firms may wish to respond with these principles in mind addressing their specific concerns.

Next steps

A detailed description of the draft guidance is beyond the scope of this article, but the consultation can be accessed here. Firms should review the same and consider making submissions to the FCA.

The consultation closes on 7 September 2018 for firms to submit their views to the FCA. The FCA plans to issue a response in December 2018. Thereafter firms should monitor for the finalised guidance with a view to implementing it within their existing governance frameworks.