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Recent European Case Law looks at requirements for consumer terms to be plain and intelligible

Is it time to ditch traditional drafting principles?

Traditional approaches to drafting, and a desire to ensure full protection in terms and conditions for the lender, and cover for every eventuality, as well as a desire to minimise cost, may drive a desire for a “lighter touch” review. However, the time has long passed for a more radical approach to terms and conditions. The issue has been recently highlighted once again by a decision of the European Court of Justice. Whilst the factual issue before the court (loans in a foreign currency) might not be of immediate relevance to most lenders consideration was given to how the requirement for contracts to be written in plain and intelligible language should be applied to terms in a consumer contract.

Why should we change our approach to terms and conditions?

The principle of fairness in contractual terms has been around since 1977 when the Unfair Contract Terms Act 1977 became law but was enhanced considerably in consumer contracts in 1994 when the Unfair Terms in Consumer Contracts Regulations (amended in 1999) implemented the EU Consumer Rights Directive (the CRD)  to be replaced by the Consumer Rights Act 2015.  The principal requirement of these provisions is that the terms must be plain and intelligible.

Contract terms were also partially the focus of the FCA’s Feedback Statement FS 16/10 “Smarter Consumer Communications”.

With this background there are increasing risks of regulatory action and legal challenge.

Is the concept of “plain and intelligible” sufficiently clear to be “plain and intelligible”?

To the extent that it is not, from the recent European Court decision, it has been made clear  that the requirement for a contractual term to be drafted in plain intelligible language requires that the term must be understood by the average consumer, who is reasonably well informed and reasonably observant and circumspect both on a formal and grammatical level, and also in terms of its concrete effect, but also able to assess the potentially significant economic consequences of such a term for his financial obligations.

Conclusion – What should your approach now be?

The concept of terms being plain and intelligible is not a new one but is one that has taken its time to embed into financial products.  As emphasised by the FCA it is necessary to consider:

  • What the consumer needs to know
  • How much they need to know, and
  • When they need to know it

It is recognised that regulatory requirements are a potential barrier to clear communication: Taking this into account the following points are worth considering:

  • Where the provision of information and the manner in which it is provided is a regulatory requirement avoid repetition and do not include the same information to the terms and conditions
  • Consider layering-providing the key information as part of the statutory information but directing the customer to where more detailed information can be found –if it is necessary to include the more detailed information as part of the agreement ensure this information is part of the t’s & c’s and that t’s & c’s are expressly made part of the agreement
  • Avoid technical language or legal jargon and references to statute unless this is a regulatory requirement. Suitable alternative language will usually be available
  • Use FAQ style particularly with paragraph/section headings which clearly indicate what information is being provided.
  • Consider other ways of creating a more engaging style
  • Rather than work on amending existing terms-start with a blank sheet of paper
  • Ensure clauses are fair and balanced and not restricted (eg don’t include rights to enter private property to recover possession of vehicles or jurisdiction clauses which restrict customer’s choice of jurisdiction).
  • Put yourself in the position of your customer who has limited financial and legal knowledge – would you be able to understand what the term means if you were in their position?

For further information please contact David Wood

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FCA & Consumer Credit Regime DWF help you navigate through the changes.