- FCA’s first ‘unfair term’ undertaking relates to an insurance policy term
- The term was found to be capable of two different meanings and confusing
- The Insurer cooperated and undertook to amend the term and pay compensation to affected policyholders
25 Jul 2017
LGI agreed with the FCA’s interpretation and has introduced an amended term and paid £47,000 in redress to 300 customers affected because their claims were denied due to the ‘unfair term’. In its notice of undertaking, the FCA said that firms should remain alert to these undertakings as part of their risk management processes as they will show “the likely attitude of the courts, the FCA, the CMA or other qualifying bodies to similar terms or terms with a similar effect.”
An Undertaking provided by London General Insurance Company Limited (LGI) to the Financial Conduct Authority (FCA) under the unfair contract terms provisions of the Consumer Rights Act 2015 (the Act) was published on 12 July 2017, and is the first of its kind since those provisions came into force on 1 October 2015. The FCA had found that a term, introduced in November 2014, in LGI’s Extended Warranty Protection Policy was not in “plain and intelligible” language as required by the Act and was capable of having two different meanings. As a result, LGI agreed with the regulator to amend the term and pay redress to customers whose claims were wrongly denied because of its wording.
The policy was provided by Nationwide Building Society to customers with a Flexiplus Current Account and related to those customers’ eligible appliances and equipment. The term was at the outset and related to what items the policy covered. A list of fourteen items (e.g. Cooker hood, Food Blender, Dishwasher etc.) was set out however the words “Items such as” preceded the list. Although both LGI and Nationwide intended that the list of fourteen items was exhaustive, the FCA and, it appears many of the policyholders, did not. Other information accessible to policyholders apparently supported the interpretation that the list was non-exhaustive and included examples only.
The FCA’s assessment was therefore that the term was contrary to provisions of the Act. Its language was not “transparent” or “plain and intelligible” as required by section 68 because it was capable of two different meanings therefore confusing customers. Section 69 of the Act required that where a term is capable of two different meanings, it should be applied in a manner most beneficial to customers.
Remedying the situation
As a result of the FCA’s investigation, LGI reviewed the situation, fully cooperated and agreed with the FCA’s assessment of the term,.
It introduced a newly amended term from April 2017 which:
- removed the words “such as”;
- expanded the list to include a wider number of items that are covered by the policy; and
- made it clear in the policy and any supporting materials that only the items on the list are covered.
It reviewed past claims which may have been declined as a result of the way the term was interpreted and agreed to pay of £47,000 in redress to approximately 300 customers; and broadened the claims process for any claims that come in during the period between the undertaking being agreed and the new term being in use.
In its public notice, the FCA has reminded firms that it can challenge terms of consumer contracts it views as not being transparent under Part 2 of the Act. These challenges do not have to arise from a consumer complaint, they may simply arise from a review of policy terms that are drawn to the regulator’s attention during the course of its work with firms. They may also be the result of a referral from a consumer, consumer organisation or enforcement body. The FCA said that firms should remain alert to these undertakings as part of their risk management as they will show “the likely attitude of the courts, the FCA, the CMA or other qualifying bodies to similar terms or terms with a similar effect.” The FCA has a duty under the Act to notify the Competition and Market Authority (CMA) of the undertakings that it receives and these are then published publically on both the CMA and FCA websites.
One of the principal purposes of the Act, which has applied to consumer contracts since 1 October 2015, is to give effect in the UK to the Unfair Contract Terms Directive 93/13/ECC. Part 2 of the Act replaced the Unfair Terms in Consumer Contracts Regulations 1999 and applies to contracts entered into, and relevant notices issued, on or after 1 October 2015. Part of the legislative programme introduced through the Act, was the conferring of a statutory role on the CMA comparable to that of the Office of Fair Trading (OFT) in relation to unfair contract terms.
The CMA and a list of 10 other regulators, including the FCA, are entitled to take enforcement action such as injunctions, enforcement orders, temporary court orders under the Act. This is the case when a term or notice in a consumer contract is considered by that regulator to be: unfair; in breach of the transparency provisions in the Act; and/or ‘blacklisted’ by virtue of the provisions in the Act. The term may be challenged if it appears in a consumer contract; is proposed for use in such a contract; or is recommended by a third party for use in a consumer contract. A business can also however provide an undertaking to stop using, or to adequately revise, a term or notice which may be acceptable to the relevant regulator in lieu of court proceedings.
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