Time for financial services firms to read the small print

Most financial services firms now recognise the benefits of clear contractual terms with consumers. Many have already reviewed their terms and tried to ensure their contracts are in 'plain English'. But the Government thinks there is more to do and has set out to tackle the issue in a White Paper entitled Fair, Clear and Competitive - The Consumer Credit Market in the 21st Century.

The White Paper states that "Consumers are confused by the complexity of modern credit products and a lack of transparency in the way they are sold". It considers that the current rules on marketing within the credit industry have resulted in a highly technical and complex regime, which has created uncertainty for lenders, consumers and regulatory authorities.

As a key part of changing this position, new regulations will require a range of specific information to be clearly provided as a part of any advertisements for credit products. This includes the amount of credit, frequency of payments and total amount payable. Wherever the Annual Percentage Rate (APR) is shown, it must be double the size of the surrounding text and shown more prominently (e.g. in bold).

The White Paper then deals with the way the small print is presented in any contract between the consumer and the financial services firm. Citing research that 39% of consumers only read the important information on the first page of any credit agreement, the White Paper is keen to see the adoption of 'honesty boxes', which have been introduced into the contractual process in the US. These set out the key information about the product, in a clear way which is intended to allow consumers easily to make like-for-like comparisons with other products.

The White Paper is also keen to update the terminology used in agreements, replacing arcane terms with clearer expressions such as "your rights" and "your responsibilities", and clearly setting out procedures for dealing with cancellation, or lost or missing cards.

The proposed changes in the White Paper reflect a trend in consumer-biased legislation which is filtering its way into the UK from Europe.

The Distance Marketing of Consumer Financial Services Directive was adopted by the European Parliament in September 2002, and must be implemented in UK law by October 2004. The Directive regulates sales of financial services products which are carried out at a distance – including sales concluded over the internet, by e-mail, over the telephone, or even simply where the consumer fills out forms and sends them in the post. The Directive applies to almost all products sold to consumers in the financial services sector, and almost all businesses within the industry.

One of the most important changes brought about by the Directive is the requirement that consumers are provided with specific information about the supplier, the product, the contract terms and their rights of redress. This information must be supplied "in good time" prior to concluding the contract, which may mean providing the information in any marketing material provided to the consumer, but at the very least it should be provided before the agreement is signed.

The information to be provided includes:

The identity and main business purpose of the supplier;

The geographical address at which the supplier is established, and any other relevant addresses;

A description of the main characteristics of the financial services product;

The total price, including all fees, charges, expenses and taxes (or where the price cannot be established precisely, the basis on which it will be calculated);

Details of the existence of any risks or fluctuations in markets which are outside the supplier's control and which could affect the product;

Arrangements for payment and performance under the contract;

Any additional costs which the consumer will face as a result of using the means of distance communication;

The existence (or absence) of the right to a cooling-off period, during which the consumer can withdraw from the contract without suffering any loss, and instructions on exercising the right of cooling-off;

Any rights of termination of the contract;

Any contractual provisions which specify the applicable law, or courts of jurisdiction over the contract; and

Whether there are any rights of redress under the contract, other than through court.

This information must be presented in a clear and comprehensive manner, and must be presented to the consumer in good time before the contract is concluded. It may therefore be provided in any marketing material, and information provided in terms and conditions should comply with the requirements of the Directive.

The White Paper is open to consultation, the consultation period closes on 15 March 2004.

See:

• White Paper (116-page PDF) here.
• HM Treasury information on implementing of the Distance Marketing Directive here.