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FAIRNESS - a term still open to interpretation in the UK. Despite lots of pending regulation for the consumer (e.g. EU harmonisation, MiFID, new protection for vulnerable customers, stronger rules against misleading commercial practices, a new credit Act with an emphasis on the burden of proof lying on the creditor and implications on record keeping, etc..), will the lack of a single definition of ‘fairness’ in terms of dealings with customers affect implementation of the FSA’s Treating Customers Fairly regime, or will the overall effect lead to shift in the balance of power towards consumers?
(by Roger Tym, partner at law firm Lovells)

MiFID and TCF requirements coming into effect next year could merely be the prelude to wider change of definitions in relation to the concept of acting fairly when providing and intermediating financial services, warns Roger Tym, partner at law firm Lovells.

He suggests the current challenge in coming up with an all-round legal definition of ‘fairness’ is set to step into high gear over coming months as the industry is about to be ambushed by three additional sets of legislation being thrashed out at European and UK level.
These include the EU’s Unfair Commercial Practices Directive (UCPD), the UK’s Consumer Credit Act 2006 (CCA), and considerations of the Law Commission Report on Unfair Terms in Contracts February 2006.

Tym says these together will create significant legal headaches in terms of interpretation, not least because they offer contradictory views on what constitutes ‘fairness’ in dealing with clients, and in fact may even contradict themselves.

For example, the UCPD is a so-called harmonisation directive due for implementation by December 2007, which means it must be applied at the national level without the possibility of introducing changes to make the directive more palatable at the national level.

However, in matters of financial services, the EU has already agreed that any directives will apply minimum harmonisation – the very reason MiFID and other financial services related directives undergo considerable FSA and government tinkering.

So, while calling for maximum harmonisation, the UCPD actually applies in the minimum sense - which raises questions of re-interpretation of its General Prohibitions - Particular Prohibitions and Annex 1: ‘Black List’ points meant to improve the level of ‘fairness’ in dealing with consumers.

General prohibitions would apply to practices contrary to requirements of professional diligence or which materially distort economic behaviour of the average consumer, and offers special protection for vulnerable customers, Tym says. Particular prohibitions apply to misleading commercial practices or aggressive commercial practices.

The “Black List” names activities not allowed under any circumstances, including:
• falsely claiming to be signatory to a code of conduct;
• falsely stating a product will only be available for a short period of time;
• repeatedly soliciting business by telephone, facsimile, email etc, or
• demanding payment for goods supplied but not solicited by the customer.

Tym says the Black List, in practical terms, would also apply to activities such as:
• pointing consumers to supportive editorial content in media, without also telling those consumers the content may be paid-for ‘advertorials’;
• pyramid schemes; using any aggressive sales tactics, including paying unscheduled visits to people’s homes;
• or suggesting to consumers – in the style of double-glazing salesmen – livelihoods could be at stake if the sale is not made.

Tym notes the directive’s use of the phrase “average consumer” would mean someone reasonably well-informed and reasonably observant and circumspect – similar to the ‘man on the Clapham omnibus’ test already in use in UK law, although perhaps not exactly exchangeable as a concept given the average person in Clapham these days may work in financial services-related jobs.

The legal interpretation Lovell’s has of the general prohibitions points is they imply a relative standard of operating a business, below which it is alright to fall as long as there is no customer detriment. However, if the standard falls to the customer’s detriment, then there will be trouble.

The general objective of the articles of particular prohibitions is to ensure consumer choice is not harmed, Tym says.

Of particular interest is how the UK will deal with conflicting definitions of ‘fairness’ suggested by the UCPD, on the one hand, and, on the other, by the House of Lords in relation to the case Director General of Fair Trading v First National Bank plc back in 2002.

Then, the Lords laid down some definitions of fairness meant to bring more transparency to the relationship between supplier and customer, which essentially said the supplier could not take advantage of customers even on a matter of “indigence” - lazy customers - besides factors of customer lack of experience, unfamiliarity of the subject matter of the contract, or a weak bargaining position.

Tym says in a battle to define fairness between the case above and the UCPD, the latter would likely set the new benchmark as it is law worked out at the European level.

In addition to its application to the Unfair Competition and Practices Directive to the UCPD, Tym says the concept of ‘fairness’ will be pushed by the Consumer Credit Act 2006, which itself updates law which has now been in place for some 30 years and should come into effect by April next year.

Section 19 of the Act means a court can rule relationships between creditor and debtors unfair because of agreement terms, the way the creditor may have attempted to enforce his rights, or “any other thing done (or not done) by or on behalf of the creditor (either before or after the making of the agreement or any related agreement)”.

At the same time, however, the Act specifically fails to define fairness because of the trouble consumers have had under the previously existing credit legislation, in which it was virtually impossible to in court prove unfairness of contracts, even where consumers may have been charged 50%, or even 200% or 300% rates of interest on loans, Tym says.

The government is intent on the courts defining fairness through the cases which may be brought under the new legislation, Tym says, to the extent no minister has ever gone on record in Hansard in response to Parliamentary Questions during the Bill stage, to offer a definition of fairness intended by the wording of the legislation.

Section 140A (2) states: “In deciding whether to make a determination that a relationship is unfair the court must have regard to all matters it thinks relevant (including matters relating to the creditor and matters relating to the debtor).”

Besides the actual lack of a definition of ‘fairness’, and a new emphasis on the burden of proof lying on the creditor, Tym warns the new credit Act is retrospective, for example, able to be applied to mortgages business done before M-Day. Record keeping is likely to become crucial in meeting this legislation, Tym adds. Finally, the ability to deal fairly with consumers will be impacted by the Law Commission's work into Unfair Terms in Contracts.

Tym says the consultation done in 2005 highlighted confusion created by conflicting definitions in the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999 (UTCCR).

The objective is now to create a single regime for consumers, replacing previous efforts with a single piece of national legislation. However, it is also the case while certain provisions will apply to small businesses in particular, these provisions will not apply to financial services.

Recommendations by the Law Commission were for fair and reasonable conduct being defined by transparency, substance and effect on consumers, as well as expanding the so-called “grey list” currently included in the UTCCR.

This includes a list of “indicative and non-exhaustive list of terms which may be regarded as unfair”, although the terms, unlike the “Black List” in the UCPD, can be challenged by consumers, the OFT and even the FSA.

Tym concludes by saying the upshot of all the legislation coming through over the next 18 months may be to leave the industry no more certain of a single definition of ‘fairness’ in terms of dealings with customers – and something that may affect implementation of the FSA’s Treating Customers Fairly regime – but the overall effect on the industry will in any case be to shift the balance of power towards consumers.

Tym says this can be stated as a move away from 'caveat emptor' to 'caveat venditor'.

ID: 38764
Author(s): iff
Publication date: 13/10/06

Link to the EU’s Unfair Commercial Practices Directive (UCPD)

Created: 18/10/06. Last changed: 18/10/06.
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