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FCA final guidance issued – assessing fairness of variation terms in financial services consumer contracts

  • United Kingdom
  • Financial services
  • Financial services - Retail finance


On 19 December 2018, the UK’s Financial Conduct Authority (FCA) published its final 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of recent case law of the Court of Justice of the European Union (CJEU) following completion of its consultation on its draft guidance, GC18/2 (a copy of this consultation and the draft guidance can be accessed here), on 7 September 2018. The guidance outlines factors that financial services firms should consider under the Consumer Rights Act 2015 (CRA) when drafting and reviewing variation terms in their consumer contracts. The finalised guidance is largely the same as the draft guidance provided for consultation apart for a number of areas where the FCA has provided clarification following its receipt of feedback from various stakeholders, individuals, firms and industry associations. A summary of the key areas of clarification provided by the FCA in the guidance are set out below.

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, credit card agreements or individual savings accounts.

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.

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.

This guidance outlines a number of non-exhaustive areas that the FCA believes firms should consider when drafting and reviewing variation terms. These areas include and are not limited to:

  • the validity of the reason(s) for using the variation term
  • the transparency of the variation term
  • provision for notice to the consumers in the variation term
  • provision for the ability for consumers to terminate the contract if they do not want to accept the variation


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

In May 2018, the FCA launched a consultation on draft guidance on unilateral variation terms (a link to the consultation and draft guidance is here) as:

  • they are often the most complex terms to assess for fairness
  • clarification of the legal principles arising from recent CJEU case law developments that are relevant to financial services consumer contracts is required
  • a large proportion of contract terms referred by consumers to the FCA relate to variation terms

Following the end of the consultation period for this guidance on 7 September 2018, the FCA considered the feedback received from 13 respondents which included industry associations, firms, other stakeholders and individuals. A summary of the feedback was produced by the FCA in December 2018 to accompany the finalised guidance also published in December 2018 and to indicate how this feedback has been addressed in the final guidance (a link to the summary of feedback document can be accessed here). The guidance is not a substitute for legislation and case law but is essential reading for firms providing financial services to consumers. A summary of the key areas of clarification provided by the FCA in the final guidance are set out below.

The FCA has confirmed that it has not found any evidence of widespread customer detriment from its unfair terms case work and is not planning to conduct any further work now that the finalised guidance has been issued (a link to the finalised guidance can be accessed here). 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 in the market place.

Determining the fairness of variation terms

The 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 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 guidance provides 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 12 factors outlined in the 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.
  • 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 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 guidance, 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 guidance 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 to the extent the guidance refers to the principles contained in the CJEU case law.

Summary of key areas of clarification in the final guidance

The FCA has emphasised in both the guidance and the summary of feedback that the guidance is not intended to provide an exhaustive list of all the factors for determining what variation terms would be or would not be considered fair. It is instead the FCA’s aim that the guidance raises awareness and provides their view on the factors that firms should bear in mind when considering fairness issues under the CRA when drafting and reviewing unilateral variation terms in their consumer contracts. It is only a court that can determine the fairness of a term and ultimately the guidance does not alter the law.

In the summary of feedback, the FCA has discussed a number of areas of clarification in respect of the draft guidance that it received feedback on and which have been addressed in the final guidance. A summary of the main areas of clarification are set out below:

1. The role of the Senior Managers Regime and the appropriate allocation of the responsibility for ensuring that consumer contracts are fair and transparent

The guidance explicitly confirms that in accordance with the principles of accountability from the Senior Managers Regime, the FCA expects that responsibility for ensuring fair and transparent consumer contracts is clearly set out within firms’ Statements of Responsibilities. For those firms that are not yet under the Senior Managers Certification Regime, they are expected to continue to refer to current rules and guidance in this area including but not limited to the FCA’s Principles of Business and Systems and Control Sourcebook in the FCA’s Handbook.

2. The fairness test: balancing the legitimate interests of the firm and consumer and good faith

The guidance includes further clarification on the fairness test by reference to the Council Directive 93/13/EEC and the CJEU’s guidance and the overarching requirement that firms apply the statutory test and consider both the legitimate interests of the firm and those of the consumer when assessing the fairness of a term. It confirms that when “determining whether a significant imbalance in the rights and obligations of the parties under the contract arises ‘contrary to the requirement of good faith’, the court must assess whether the seller or supplier, dealing fairly and equitably with the consumer, could reasonably assume that the consumer would have agreed to such a term in individual contract negotiations” (c-415/11 Aziz at paragraph 69). This is more favourable to the consumer than the fairness test in the CRA which requires a “significant imbalance” to the detriment of the consumer.

3. The transparency of the variation term and a firm’s policies, in particular interest rate setting policies, as part of the circumstances existing when a contract is agreed

The FCA has removed all references to policies and in particular interest rate setting policies from the final guidance. It has included clarification to ensure that firms are made aware that they should consider their obligations under competition law when considering what information to provide to their customers. The summary of feedback confirms that firms are not expected to disclose commercially sensitive information such as pricing, customer or market information or customer strategy and that any such disclosure could lead to prosecution not only for the firm for disclosing but also other firms for receiving this information.

The guidance has provided more focus on variation terms for price changes. It confirms that firms should consider whether it is practicable to give the consumer a simple explanation that the average consumer could understand, the average consumer being a consumer that is assumed to be reasonably well-informed and reasonably observant and circumspect, of the firm’s likely approach to changing prices. It has suggested that such an explanation should cover:

  1. the circumstances in which the prices may change
  2. generally how the new price would be determined
  3. the potential size of any price increases

4. Passing on of costs that can be only be fairly allocated to the product

The FCA in its summary of feedback recognised the practical issues and cost implications of detailed calculation of the costs attributable to each of the firms’ different products. It confirmed that it does not expect that firms carry out a “precise mathematical calculation” but that where the reason for the variation relates to changes in costs that firms fairly and pragmatically view the circumstances of what costs should be fairly allocated to the product or service. This is given that firms have some idea of costs so that they can assess the profitability of their products and make reasonable assumptions allocating particular costs to particular products.

5. A reason which allows the firm to make changes to reflect changes in regulatory (including Prudential requirements)/ legislation

The FCA has confirmed in the summary of feedback that this reason is generally likely to be valid especially if the changes made by the firm are confined to those changes required to meet new legislation or regulatory requirements. However, the FCA has not ruled out circumstances where firms implement changes that go beyond the minimum changes required and these changes are to the consumer’s advantage, as the existence of a valid reason is only an indicator of fairness to be considered as part of the overall assessment of fairness.

6. The likely invalidity of a reason enabling a variation that allows the firm to remain competitive

In consideration of feedback from firms that this reason may be a valid reason in order to respond to changes in the market place, the FCA has confirmed that this is generally unlikely to be accepted but that there may be other reasons that may be considered valid that are not set out in the guidance of which this reason could fall under. However, the FCA has emphasised that firms should carefully consider whether a right to vary for this reason would strike a fair balance between the legitimate interests of the firm and those of the consumer.

7. Contracts of indeterminate duration and determinate duration and the ‘valid reasons’ to vary them

Further clarification has been provided by the FCA in the guidance that a variation term in a contract of indeterminate duration would still need to be assessed for fairness in all the circumstances even though in principle the FCA recognises that a variation term in such a contract that did not specify the reasons for the variation is less likely to be unfair than a similar term in a contract of determinate duration. Such circumstances include terms regarding notice, freedom to exit, practical barriers to terminating the contract and the information given to the consumer about the variation term and firms should carefully weigh up whether such a wide variation term strikes a fair balance between the legitimate interests of the firm and the consumer and whether the consumer has been treated fairly when making the changes to the contract. The FCA recognises that a variation term in a contract of indeterminate duration that did specify reasons is more likely to be considered fair as it is essentially more transparent to the consumer and that the ‘derogations in Part 2 of Schedule 2 to the CRA are not exemptions from the application of the fairness test and such terms are not presumed fair.

However, the FCA has also provided limited clarification for contracts of a determinate duration but only in relation to longer term contracts where at the time of entering the contract the firm reasonably considers that it could not foresee all the circumstances that could justify varying the term. In assessing the fairness of such a term as set out above and depending on the circumstances, a wide variation term for any reason could be justified in longer term contracts but this will be decided on a case by case basis and is less likely given the lack of required transparency and the fairness test. This means the FCA recognises that a reference to “any other valid reason” cannot be ruled out in longer term fixed contracts. It is advisable for a firm to include a number of clearly defined reasons to give it the best chance of making variations on a fair basis.

8. The requirement to give notice to consumers

In the summary of feedback, the FCA has provided some general explanation relating to the provision of notice as one of the factors in the assessment of fairness. It confirms that where a term falls within one of the paragraphs in Part 2 of Schedule 2 of the CRA, this does not in itself make the term fair and reasonable notice is assessed in consideration of the context of the matter and on a case by case basis. The FCA has included additional clarification in the guidance that whether a change is to the consumer’s advantage is a relevant factor on the length and nature of the notice to be given as such a change may be considered differently to those changes not for the consumer’s advantage.

9. The financial and practical barriers to consumers exercising their freedom to exit the contract

The FCA has clarified in its summary of feedback that the financial and practical barriers to a consumer exiting a contract that were not known or unlikely at the time the contract was entered into should not affect the assessment of fairness of the term.

Next steps

A detailed description of the guidance is beyond the scope of this article. The full guidance however can be accessed here.

In light of the guidance, we suggest that firms take steps to implement the guidance within their existing governance frameworks. Measures that we recommend that firms undertake include:

  1. gathering all their consumer contracts and check whether these contracts are for a fixed or indeterminate term
  2. identifying all variation provisions in the contracts and understanding how they currently work
  3. considering whether any variation terms in their contracts are currently unfair
  4. considering whether, following review of the FCA guidance, whether any change to the firms’ terms and conditions should be made
  5. considering the guidance when drafting new terms and conditions
  6. regularly assessing consumer contracts as part of regular reviews of all product documentation