The Consumer Rights Act 2015 for financial institutions Part III

This article focus on the impact of the forthcoming changes under the Consumer Rights Act 2015 on financial institutions.

This is the third of three articles on the impact of the Consumer Rights Act 2015 (Act) on financial institutions. Part I discusses the effect of statements made about the firm or services, and the application date. Part II discusses fairness of contractual terms and notices.

This Part III discusses consumer statutory remedies; digital and online services and products provided by firms, such as banking and payment apps and online banking services; and future challenges and risks to firms.

For the related articles, please see The Consumer Rights Act 2015 for financial institutions Part I and The Consumer Rights Act 2015 for financial institutions Part II .

Consumer statutory remedies for poor quality services

Consumers will have the right to require a firm to re-perform a service where it has not been performed with reasonable care and skill or in accordance with information given about the service. This statutory remedy will not be available if it is impossible to re-perform, or re-performance could not be done within a reasonable time and without significant inconvenience to the consumer. The consumer would then be entitled to a price reduction (up to the full contract price). Price reduction is also the statutory remedy available to a consumer for breach of information given about the firm, or if the service has not been performed within a reasonable time.

Most financial services would be impossible to re-perform, in which case the statutory remedy more likely to be sought would be price reduction. This however may be complicated and difficult to calculate where there are complex pricing mechanisms.

Firms’ online and digital products

Digital content is defined as data which are produced and supplied in digital form, but firms should note that even if a product falls outside this definition and relevant rules for digital content, the supply of the product may be treated as a contract for services. Examples of online and digital products supplied by firms to consumers include banking, payment or personal finance management apps, online banking services, and cloud storage services.

Where there is a contract for the supply of digital content or services, the rules on unfair terms in consumer contracts would apply (as well as the relevant statutory rights and remedies). Where there is no contract, the rules on consumer notices would apply (but no statutory rights and remedies, as these require there be a contract).

A consumer’s statutory rights and remedies differ according to the classification of the product under the Act. Whenever a firm considers the launch of a new digital or online product, firms should ensure they check which category of product and rules in the Act would apply.

Paid for digital content rules

These would include any apps which are paid for, whether directly or indirectly together with a paid for product and that is not generally available to consumers for free (the consumer must purchase something in order to obtain the digital content). These rules apply where there is a contract for the firm to supply the digital content.

Such digital content will be subject to statutory rights similar to those applying to goods, including satisfactory quality, fitness for purpose and compliance with description. A consumer will also benefit from statutory remedies of repair or replacement (or in the limited case of where the firm did not have the right to provide the digital content, a refund).

In addition, firms would be liable to pay compensation (an “appropriate payment”) or repair a consumer’s device or other digital content, if the digital content provided by the firm caused damage to the consumer’s device or other digital content. This would be relevant if the firm failed to take reasonable care and skill. The rules on unfair terms would apply to attempts to exclude or limit a firm’s liability under this provision. Firms should ensure that any digital content they supply is virus checked before release (and such checks are documented in case of future dispute).

Free digital content rules

Digital content which is supplied for free under a contract will also be subject to the damage to device rule described above. However the other statutory rights and remedies described above for paid for digital content would not apply.

Provision of services

Firms should note that even if a product does not fall within the definition of digital content in the Act, it is possible that the Act’s rules on services would apply if there is a contract for the provision of services. For example this may be relevant for cloud storage services, if firms provide consumers with a storage service in the cloud for the consumer’s documents or other items.

Challenges for firms under the new regime

No FCA guidance?

The FCA had previously indicated that it would form its views on the implications of the Act after publication of the CMA’s guidance on unfair terms. However, to date, no FCA guidance has been published, creating uncertainty for firms on key issues such as unfair terms.

This uncertainty is compounded by the FCA’s removal of some materials (guidance and undertakings) from its unfair terms library in March, stating these were “no longer reflective of the FCA’s views and should not be relied upon”. At that time, the FCA stated that it was considering its views on unfair terms in light of the Act, recent EU case law, and the CMA’s then draft guidance on unfair terms.

Other areas of uncertainty include the relationship between the rules on consumer notices and financial promotions, and the relationship between rights and remedies under financial services specific legislation and regulation and the Act’s statutory rights and remedies for services.

Pressure from Consumers’ Association (Which?)

The Consumers’ Association (Which?) will continue to be an enforcer of unfair terms under the CRA as under the UTCCRs (though unlike regulators, it has no power to require the production of information from a firm). It also continues to be a vocal advocate of consumers’ rights against allegedly unfair terms. Post October, firms may see pressure from Which? in the following areas:

  • unfair charges “hidden in plain sight” - whether a charge has indeed satisfied the Test of Prominence
  • Variations which go against a consumer’s “reasonable expectation” that the bargain he has entered into will not change, and
  • in the case of variations by a firm, a termination right which cannot be exercised in practice because the consumer cannot switch, there are no alternative equivalent products, or because switching to an alternative product leaves the consumer equally disadvantaged.

During the Parliamentary progress of the Act, Which? (and other consumer advocacy bodies) raised concerns about “mortgage prisoners” who in the case of an allegedly unfair variation were unable to obtain an alternative mortgage despite having a right to terminate. They proposed a new Grey List term making indicatively unfair any variation of interest rates or charges without a valid reason unless the consumer could terminate the contract immediately and would not be disadvantaged by doing so. The CMA has also raised concerns about “captive consumers”. In view of the Government’s power to amend the Grey List to add to it, there may be pressure in future to include such a Grey List term.

Practical termination rights would pose a difficult challenge for firms, especially those involved in large volume transactions and a variation across thousands of such contracts. Attempting to consider whether a consumer (potentially one of thousands) could switch to a suitable alternative product may require a firm to first review the market for potential alternative products providing the same or better rate and charges than the consumer’s existing product before variation, and/or require assessment of each consumer’s financial suitability for alternative products.

Threat of ECJ decisions

Finally, firms should continue to keep a watching brief on ECJ decisions under the Unfair Terms Directive. Many of the most difficult developments on unfair terms (such as on the Test of Transparency and practical termination rights) derive from the ECJ, not the English courts. This trend may continue after October when the Act comes into force. Importantly, these are cases which also apply under the UTCCRs, so present a significant litigation risk for all contracts with consumers entered into before 01 October.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.