OFT publishes guidance on ongoing contracts with consumers

OFT publishes guidance on ongoing contracts with consumers

In 2010, the OFT launched a market study into consumer contracts.   In 2011, the OFT published the results of that market study. Its report highlighted the types of contracts, and specific terms, that are most harmful to consumers. It also provided useful guidance on how the OFT planned to assess the fairness of consumer terms in future.

The market study showed that consumers rarely read contracts in full before they enter into them, so they are often unaware of some of the terms that they have agreed to. Consumers can also make mistakes in interpreting terms that they are aware of, even when they are taking reasonable care. Problems also include a lower quality of service than consumers are expecting, problems in obtaining access to a service, firms interpreting contracts to their own advantage and poor customer service.

The OFT and subsequently the CMA will retain the lead role for enforcement of unfair contract terms legislation, as well as providing business guidance in this area, together with a range consumer enforcement powers. The government has published a Draft Consumer Rights Bill which is intended to replace the controls on unfair terms in consumer contracts currently in the Unfair Terms in Consumer Contracts Regulations 1999 (SI 1999/2083) (UTCCRs) and the Unfair Terms Act 1977 (UCTA) .

Ongoing contractual relations with consumers

Building on its market study into consumer contracts, the OFT has published a practical guide, Key Issues in Ongoing Contracts (guide), for enforcement officers who deal with problems faced by consumers arising from ongoing contractual relations.

Ongoing contractual relations mean continuing contractual and other arrangements (often long-term) between consumers and suppliers that involve repeat or regular supply of goods and services. The guide gives the following examples:

  • Club or scheme membership subscriptions.
  • Insurance contracts.
  • Telecoms and broadcast service packages.
  • Banking services and savings products.
  • Supply of utilities.

Common problems in ongoing contractual relations with consumers

The OFT observes in the guide that consumers can experience a range of problems in their ongoing contractual relations with businesses. Contracts involving longer-term relations can be complex and are frequently based on standard terms. Real or perceived benefits can increase consumers’ tolerance of problems, and inertia or other barriers to switching can keep consumers locked in to unfavourable agreements.

In the guide, the OFT focuses on the following issues which have emerged frequently in complaints, have the potential to cause serious consumer detriment, could distort competition by limiting consumer switching, and are relevant across several different sectors:

  • Cancellation. Terms that create tie-ins or restrictions on cancelling or switching may give rise to problems for consumers. Such terms might include terms that provide for a minimum duration, high exit fees on termination and terms that set burdensome notice periods or procedures for termination. The OFT observed that such terms can have the effect of preventing or inhibiting switching away from a poor supplier or of locking a consumer in to buying a poor product. The OFT noted that provisions relating to cancellation are particularly likely to be harmful where:
    • consumers are not made sufficiently aware of small print terms and conditions;
    • tie-ins or other conditions are not sufficiently clear for them to be fully understood by consumers;
    • tie-ins are unreasonably onerous, or cancellation charges are unreasonably high;
    • insufficient information is provided to consumers to enable them to accurately assess whether or not they are likely to want to switch;
  • Rollover/renewal. Automatic rollover or renewal is where a consumer signs up to a minimum contract period that is automatically renewed or continued unless the consumer explicitly tells its supplier that it does not want this to happen. The OFT noted in the guide that automatic renewal is potentially detrimental to consumers where it results in a decrease in switching, say, because of the limited window which a consumer may have to switch without incurring additional cost. The OFT also noted that automatic rollover is likely to be most harmful where there are additional problems associated with it, such as:
    • it is not disclosed to consumers at the outset;
    • the supplier uses small print to couple rollover with onerous cancellation charges;
    • the supplier uses awkward procedures for cancellation or opt-out (including unduly short periods), or an unduly long minimum contract or cancellation period;
    • the supplier fails to highlight, either at sign-up or at rollover, that the subsequent tie-in period is on less favourable price or other terms than the first;
    • where it occurs in the context of a free trial;
  • Variation. The OFT highlighted that terms permitting variation, especially of price, during the period of the contract can cause problems if they are not transparent and the consumer does not have the right to cancel. The OFT observed that variation by a supplier during a contract is more likely to be harmful where:
    • suppliers are incentivised to lure consumers in with terms that are very favourable at the outset but for only a limited period before they change to being significantly less favourable;
    • variation is not limited to factors beyond the supplier’s control;
    • consumers are locked in to the contract. Such problems may be reduced if a consumer is permitted to withdraw from the contract without penalty where a variation is made;
    • price variation is unexpected as a result of a consumer not being provided with sufficient information;
  • Provision of information. If information is incorrect or misleading, insufficiently clear or prominent, delayed, or limited, then consumers may find it difficult to make informed choices. The OFT said that unscrupulous suppliers may seek to exploit consumers through hidden charges or unexpected limitations in ongoing contracts.

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