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The Impact of the CRA on Financial Services

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About The Author

Anirudh Mandagere (Former Law and Social Policy Editor)

Anirudh is the judicial assistant to Lord Justice Jackson. Previously he studied History at St. Catherine’s College, University of Oxford and undertook the Graduate Diploma in Law and the Bar Professional Training Course at City University. Outside of the law, Anirudh enjoys running, badminton and watching the cult Netflix series, ‘Bojack Horseman’.

The CRA 2015 (CRA) is one of the most significant pieces of UK contract legislation since the Unfair Contract Terms Act of 1977. It seeks to reform and consolidate consumer law by bringing the UK into line with the European Consumer Rights Directive, the Misleading Commercial Practices Directive, and the Alternative Dispute Resolution Directive.

The vast scope of the CRA means that it is vital to analyse the specific impact of the legislation on financial service providers (‘Provider(s)’). For example, the Act widens the definitions of ‘consumers’ and ‘traders’ to include additional entities which may be affected by Providers. Indeed, the CRA’s definition of a ‘trader’ now applies to Providers on the basis that they provide a ‘contract for the transfer of goods’. Further, a consumer is defined as ‘an individual acting for purposes which are wholly or mainly outside that individual’s trade, business, craft or profession'. This concept of a consumer acting ‘wholly or mainly’ outside their trade is patently much wider than the original criteria of a consumer as someone ‘acting for purposes…outside any business he may carry on’.  

In light of the profound changes contained within the CRA, I will consider the impact of the Act on three main areas on consumer rights - pre-contractual information, unfair terms, and remedies – and whether these changes have truly transformed the arena of consumer rights. 

Pre-Contractual Information

Under Section 50(3) of the CRA,  anything that is said or written by the trader to the consumer now constitutes a term of the contract if it is taken into account by the consumer when making decisions.

In practice, this will have great implications for companies who use third party agents to sell financial products. Often such products are sold by a broker or other intermediaries, meaning that under Section 50(3), anything that the broker states about the product can now be regarded as a term of contract. The result of this is that agents who sell such financial products may now have to abide by a more restrictive sales script, closely monitored by Providers to ensure that no unexpected terms are included within the contract. Indeed, in circumstances where statements made by a third party are instituted within the contract and are later breached, the Provider is still liable under Section 75 of the Consumer Credit Act 1974 for breach of contract.

Consequently, Section 50(3) represents a novel approach to consumer rights and increases the importance of pre-contractual information. It significantly bolsters the rights of the consumer and should increase regulation and scrutiny over third-party agents.

Unfair Terms

The general rules concerning general contractual fairness are unchanged by the CRA. Namely, a term of contract is considered ‘unfair’ if it causes a significant imbalance in the parties’ rights and obligations so as to weaken the position of the consumer. Further to this, the fairness of a term is to be considered depending on both the subject matter of the contract and all surrounding circumstances.

However, the CRA makes two major alterations to the law of unfair terms and conditions. Currently, the ‘Grey List’ provides the list of unfair terms in Section 2 of the Unfair Terms in Consumer Contract Regulations (UTCCR). The new Grey List is expanded by the CRA and includes a number of extra terms in order to ensure that consumers are not unfairly charged for services. A prime example of such new terms considered unfair under the Grey List are ‘early termination clauses’ which stipulate that consumers must pay for services even in the event that a consumer does not conclude the contract. Further to this, the CRA incorporates the new Distance Marketing Directive into the Grey List meaning that terms and conditions which place the burden of proof on the consumer to show that a trader has not complied with the Directive are now considered to be unfair.

Further to this, Section 64(1) of the CRA significantly changes the nature of assessing whether certain terms and conditions can be excluded from the ‘unfairness’ category of the Grey List. Such a term can now only be excluded if it is ‘transparent and prominent’ and can be reasonably comprehended by the ‘average consumer’. This contrasts greatly with the previous guidance given by the Financial Conduct Authority (FCA) regarding unfair contract terms. Previously, under the FCA’s Guidance, a variation term, such as a variation in interest rates, could be excluded from the Grey List if there was a ‘valid reason’ specified in the contract for the term. Now, a variation in interest rates could only be excluded from the contract if it was ‘transparent and prominent’ to the average consumer. The reasoning behind this lay in the outdated guidance given by the FCA that needed to be reviewed. This was particularly important in light of the fact that their advice had become out of step with recent decisions of the Court of Justice of the European Union (CJEU). The CJEU was most concerned with ensuring ‘fairness’ within contracts and removing any statutory exemptions from the requirement of fairness. Section 64(1) is designed to avoid any attempt at obfuscation of consumer rights where extra charges are hidden in small print. Under the CRA, the consumer is now in a position to examine the contested term and can make an informed choice as to whether they can - and should - enter the contract.

Providers have traditionally had a much higher threshold for fairness than other business, and so in theory should be able to easily adapt to these new fairness requirements. However, Providers will still need to review and redraft any existing contracts and boilerplate templates to ensure that any financial product sold complies with the new requirements.  This means that, in practice,  while previously a Provider reserved the right to ‘vary’ interest rates based on a perceived ‘valid reason’, under the CRA this provision would only be lawful if a consumer can perceive the economic consequences which may result from it.

These provisions seek to provide clarity for the consumer. However, even when the terms and conditions are clear, an avenue for redress is still required to ensure certainty to the contract. How does the Consumer Rights Act alter the scope for remedies? 

Civil Remedies

As the cornerstone of consumer rights, the Act now gives statutory remedies for services provided to consumers over and above any existing legislation for breach of contract. For example, where provisions relating to fitness and quality as set out Sections 10-14 have been breached, consumers are entitled to statutory remedies under Sections19-24. These include a right to reject, right to repair or replacement, and a right to reduction.

Moreover, the CRA provides a new and enhanced role for the Competitions and Markets Authority (CMA). While previously the FCA played the main role in challenging unfair terms in contract, the CMA is now the principal enforcer of the Act. This is a significant change for Providers which are complicit in anti-consumer behaviour. Whereas previously the sanctions available against Providers were only limited to criminal prosecution and civil relief, as a result of the Act a new remedy is available: compensation. The Act amends the Enterprise Act 2002 to introduce Section 219A which enables tribunals to award compensation for individual consumers and facilitate the enforcement of remedies.

It is envisaged that the FCA will still continue to play a role in enforcing provisions, particularly in broadening the outlook of consumer protection. In practice, this means that, in cases where consumer contracts are perceived to be misleading, the FCA will look at the conduct of the Provider before, during, and after the conclusion of the contract. This is in accordance with the FCA’s principles in determining whether Providers have paid due regard to the interests of the consumer at all stages of the contract.

This is the first time that statutory remedies have been introduced for services. However, it is still unclear as to the potential impact such remedies will have on financial services. As has been noted, many of the statutory remedies, such as the right to re-performance, simply do not apply to financial services contracts because of their very nature. Thus, it will be within the court’s jurisdiction to examine how price remedies for breach of the Act will apply.

Conclusion

The CRA has been described as ‘largely consolidation’. While this statement is to some extent true, the inclusion of new European Directives means that Providers will now have to review their existing contracts and terms of business to ensure that they do not fall foul of the new legislation. The Act itself provides stronger rights for consumers; it places a much greater burden on the trader to provide intelligible information whilst simultaneously ensuring that misleading information is not unintentionally provided. While the statute provides the foundations of new consumer rights, it will ultimately be up to the common law to interpret these rights in accordance with the principles of the CRA.

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Tagged: Banking & Finance, Commercial Law, Consumer Rights, European Union

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