Changing contract terms
Lenders who change their mortgage contract terms need to ensure the alterations are fair for consumers. Marianne Jarvis and Jasper Buxton from Moore Blatch explain
In March the Financial Services Authority exercised its jurisdiction under the Unfair Terms in Consumer Contracts Regulations 1999 (the regulations) in ruling the contract terms on mortgages provided by Cheshire Mortgage Corporation in 2004 and 2006 to be unfair, and forced the provider to give clearer written terms for the reasoning behind any interest rate changes.
The FSA recently ordered the National House-Building Council to amend the terms of one of its insurance policies, which it also considered to be unfair because there was insufficient certainty as to when a claim could be made.
More recently, the FSA announced that its Retail Conduct Risk Outlook 2012 would open a thematic review into interest-only mortgage contracts that allow firms to switch consumers from an interest-only to a repayment mortgage.
It believes some ‘switching terms’ in standard consumer contracts could pose a risk of being considered unfair under the regulations, if the terms give the firm too much discretion to determine when the switching would apply.
The FSA warned that terms which failed to clearly set out when a lender may switch a consumer to a repayment mortgage, or failed to define key phrases in the contract that specify when this right arises, were likely to be unfair.
Consequently, many lenders are advised to review their contracts for suitability and fairness to ensure that consumers are fully protected.
The Cheshire Mortgages case illustrates where the terms used might not be considered as unreasonable by many organisations:
Original Terms, 2004: We can vary the interest rate at any time. You will be notified of any change in accordance with the mortgage conditions. The notification will include details of the resulting increase or decrease in your monthly payments.
2006: Where the interest rate on your mortgage is variable (at any time during your loan period) we can vary the interest rate at any time. You will be notified of any change in accordance with the mortgage conditions. The notification will include details of the resulting increase or decrease in your monthly payment.
The FSA’s view was that this wording, allowing the issuer to “vary the interest rate at any time” was advantageous to the issuer and gave Cheshire “unrestricted power to vary interest rates without the firm specifying valid reasons for making such variations in the contract.”
Cheshire Mortgages commented that it has only varied the interest rate for the reason given in the new term (below) and it would therefore appear that there has been no actual customer detriment. Nevertheless, the FSA deemed it necessary to change the terms to prevent any consumer misunderstanding.
New Terms agreed: Where the interest rate on your mortgage is variable, we may vary the interest rate at any time. However, we will only vary the interest rate to respond proportionately to changes in our funding costs. You will be given at least 14 days’ notice in writing of any change in the interest rate. The notification will include details of what the interest rate is varied to and the resulting increase or decrease in your monthly payments.
Unfair terms – what happens?
The FSA has the jurisdiction to find terms to be unfair, and can seek an undertaking to amend the term, or apply to the court for an injunction against the lender, leading to considerable costs and damage to the lender’s reputation.
Even where the FSA is not involved, there are risks to lenders in their terms being found to be unfair, as it may lead to the court finding that such terms are unenforceable. This may lead to unexpected costs, such as those which a lender may have expected to pass on to the consumer under a specific term upon which they can no longer rely, and in terms of the costs of having to redraft and reissue the terms.
Unfair terms – how to avoid
An example of the FSA’s approach was seen in the judgement of the House of Lords in the case Director General of Fair Trading v First National Bank Plc (2001), with Lord Bingham saying that the requirement of good faith is one of “fair and open dealings” and that openness requires terms to be expressed “fully, clearly and legibly, containing no concealed pitfalls or traps.”
This judgment means that all interest rates’ changes must be clearly explained with a clear set of “reasons why” laid out in the terms of all contracts.
In that case, a term which permitted the lender to charge interest before and after any judgment, until payment in full, was held to be fair. However, Evans v Cherry Tree Finance Ltd (2007) illustrates where a clause in a finance document was held to be unfair.
A provision in a mortgage for calculating a rebate on early repayment meant that the settlement date, deferred for six months, was held to breach the regulations because it led to paying a sum that was too high.
Lenders should ensure their terms are clear and easy for a consumer to understand in plain and intelligible language and avoid the use of legal jargon. Terms should not cause a significant imbalance between the parties.
Lenders should assess contracts for fairness and ensure that their contract terms comply with relevant legislation and good practice guidance, particularly in an evolving landscape, and staff should be fully trained in the practical impact of contract terms on the consumer.
Lenders will continue to see challenges to terms and conditions from consumers and they will need to review their terms carefully.
Marianne Jarvis is a partner and Jasper Buxton is a senior solicitor at Moore Blatch Solicitors