Introduction

1. The Building Societies Association (BSA) represents mutual lenders and deposit takers in the UK including all 47 UK building societies. Mutual lenders and deposit takers have total assets of over £375 billion and, together with their subsidiaries, hold residential mortgages of £245 billion, 20% of the total outstanding in the UK. They hold more than £250 billion of retail deposits, accounting for 22% of all such deposits in the UK. Mutual deposit takers account for 31% of cash ISA balances. They employ approximately 50,000 full and part-time staff and operate through approximately 2,000 branches.

2. The BSA welcomes the opportunity to respond to the Law Commission’s and Scottish Law Commission’s consultation on unfair terms (the consultation).

General Background

3. The BSA has responded to a number of previous consultations relating, either specifically or generally, to unfair terms, including -

• the OFT’s consultation in 2007 www.bsa.org.uk/policy/response/oft_unfairterms.htm,
• the call for evidence by the Department of Business, Enterprise and Regulatory Reform in 2008 www.bsa.org.uk/policy/response/dberr.htm
• the call for evidence by the Department of Business, Innovation and Skills (BIS) in 2010 www.bsa.org.uk/policy/response/consumer_rights_directive_response.htm, and
• the recent (2012) consultation by BIS on enhancing consumer confidence by clarifying consumer law - www.bsa.org.uk/policy/response/BIS_response.htm.

The BSA believes that a long overdue, radical consolidation of consumer law that is strong, clear, and (as far as practicable) future-proofed, would be in the interests not only of consumers and but also of businesses that treat their customers fairly.

4. In OFT v Abbey National & Others [2010] 1 AC 696, the Supreme Court decided that certain contractual terms permitting charges in respect of unauthorised overdrafts were not assessable for unfairness under the relevant Regulations because they were statutorily excluded ‘core terms’.

Summary

4. The consultation deals with two fundamental points –

• whether the law needs amendment following the unauthorised overdraft charges litigation (above), and
• the possible merger of the Unfair Contract Terms Act 1977 (the 1977 Act) with the Unfair Terns in Consumer Contracts Regulations 1999 (the 1999 Regulations) and certain related matters.

5. The BSA views may be summarised as follows –

• We broadly agree with the consultation’s recommendation that a ‘price term’,(ie a monetary obligation of the consumer eg a bank charge, should continue to benefit from exemption as a ‘core term’, but only if it is transparent and prominent - with statutory guidance on ‘transparency’ and ‘prominence’. However, it is very important that any unforeseen, detrimental consequences are anticipated and averted – we provide some specific pints relating to BSA members’ products.
• As long ago as February 2005, the Law Commission proposed that the 1977 Act (a piece of UK legislation that covers exemption clauses ie ‘contractual disclaimers’) should be merged with the 1999 Regulations. The Government has now asked the Law Commission to review its position and the Law Commission stands by its earlier report. The BSA finds it difficult to understand why this obvious (and somewhat minor) piece of simplification was not implemented sooner and we advocate that, in the absence of more radical consolidation, the matter be taken forward without further delay.

The Recommendations

• Background

6. After a detailed analysis of the law, including recent court judgments, European cases, and European and international experience, the Law Commissions propose, and seek views on, the proposals about ‘price terms’ are set out on pages 102 – 103 of the consultation. Paragraph 3.54 (on page 29) of the consultation states -

Unfair terms legislation assumes that consumers are rational but busy. They do not have the time or resources to plough their way through the many standard form contracts they are given. On the other hand, if consumers are told about the price or the subject matter the legislation assumes that they will take these terms into account when choosing whether to enter into the contract. The terms will be subject to competition and should not be assessable for fairness.”

The BSA believes that the above passage is a fair and accurate representation of the underlying position.

7. The BSA recognises, and agrees with, the list of constraints on the Law Commissions’ investigation, set out in paragraph 8.5. We also acknowledge the problem of very important terms included in ‘small print’. However, it should be remembered that there is often regulatory pressure to include an increasingly large amount of text and additional material, such as health warnings, in ‘prominent’ positions. Greater consensus on what is, and is not, sufficiently important to include prominently in relevant materials would be helpful. The BSA supports the case for certainty put forward at paragraphs 8.11 and 8.12 of the consultation.

8. The BSA broadly supports the proposal that a transparent and prominent price term should be excluded from review, provided the details are right eg on what is ‘prominent’, what constitutes a ‘transparent term’, prominent/transparent to whom? etc. We believe that, in principle, such an approach is preferable – if the questions can be answered - to the uncertainties generated by concepts such as “main” term and “incidental or ancillary” term.

• Consultation Questions and BSA Responses

9. As noted above, the BSA agrees that some aspects of the relevant law are uncertain and that – even though subsequent court judgments have reduced some of the uncertainty - a degree of reform would be helpful.

10. We believe that the Law Commissions have identified the key areas of uncertainty. The BSA provided comments about the Judgment in its 2010 response to BIS - www.bsa.org.uk/policy/response/consumer_rights_directive_response.htm.

11. These are the key consultation questions. We agree with the consultation’s recommendation that a ‘price term’,(ie a monetary obligation of the consumer eg a bank charge, should continue to benefit from exemption as a ‘core term’, but only if it is transparent and prominent - with statutory guidance on ‘transparency’ and ‘prominence’.

12. However, it is very important that any unforeseen, detrimental consequences are anticipated and averted. We believe that the safeguards proposed by the law Commissions constitute reasonable steps designed to reduce the risk of unintended consequences. In particular, we take the view that the proposed definitions of ‘price term’ and ‘transparent’ are sufficiently clear to be effective in practice, and we welcome the suggestions in 10.5. From our sector’s point of view, mortgage lenders would need clarity as to whether or not a ‘price term’ included the rate of interest payable, and valuation fees, legal expenses, any other upfront costs on application, early repayment charges (generally all set out in the KFI and mortgage offer), as well as other (contingent) charges that might become payable during the life of the mortgage, usually for the payment of a service and set out in a separate tariff.

13. Also regarding mortgage lending, how would prominence work in the context of fee tariffs, which are generally provided up front at the time of application and then at least once annually. In addition, customers requesting a service after application are generally advised about the cost before the particular service is provided. The BSA is of the opinion that this should satisfy the test of prominence, but regulatory clarity on matters such as these is important. It is also our view that any term in the KFI/mortgage offer should be considered to be prominent.

14. It is also important to consider how the proposals in relation to prominence impact on contractual terms and conditions for other products that are prescribed in terms of form and content; eg agreements regulated by the Consumer Credit Act.

15. Although it is possible to make a reasonable argument that certain terms, such as price escalation clauses, are excluded from review, the BSA believes that this would be pointless in the light of accepted practice for a decade or more, and therefore we agree with question 10.4 (4).

16. We do not see why the suggestion in 10.6 is necessary.

17. On 10.7, our answer is ‘yes’ (see above).

18. On 10.8, broadly yes, but see comments above.

19. On 10.9, yes – this would seem fair and appropriate.

20. The following questions are from the Law Commissions’ previous paper on unfair terms but are repeated in the current consultation in order to generate further discussion. The BSA agrees with the sensible proposal to merge the 1999 Regulations with the Unfair Contract Terms Act 1977, and we provide comments in response to some of the other questions below.

21. There has been a lengthy series of discussions over several years of this point. In a nutshell, the BSA agrees with the present Government that the UK should not ‘gold-plate’ EU legislation. While it is true that a ‘copy-out’ approach reduces the risk of such super-equivalence, it should be possible to re-write EU legislation in order to make it more compatible with circumstances within the UK or simply to clarify uncertainties, without introducing super-equivalence and/or going beyond what is permitted in UK implementation of a minimum harmonisation measure.

22. Please see our comments on the recent consultation by BIS, which asks the substantially same questions – www.bsa.org.uk/policy/response/BIS_response.htm.

23. Yes, we see no reason to change the law in this respect.

24. Broadly we agree, but it should be noted that claims management companies (CMCs) are now very active in the UK and the modus operandi of some CMCs is to make claims even in cases where the firm in question did not sell the product to the CMC’s client. This business model, which relies on firms, ombudsmen and, potentially, the courts sorting out genuine from ‘non-sale’ complaints, causes businesses considerable problems while providing no benefits whatsoever to consumers – indeed, these ‘non-sale’ complaints are inevitably misleading to consumers. The BSA, therefore, agrees with the two positions set out in 10.14, except that in (1) the current onus of proof should remain on the claimant where the consumer is represented by a CMC.

25. The Directive was designed to cover standard term contracts and we can see no particular reason to change the position.

26. On balance, this would be clearer than the existing test.

27. Some re-writing for the sake of clarity could be helpful, but firms, regulators and consumer bodies have got used to the ‘grey list’ over the years and a fundamental re-write could lead to unforeseen consequences. Therefore, we suggest caution.

28. In principle, yes.

BSA
23 October 2012