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Thursday, 18 September 2014

The Role of Consumer Contracts, Advice and Disclosure

Great discussion at a CSFI event this morning, focusing on the difference between financial advice and guidance, and touching on the FCA's very encouraging plans to support a far better consumer experience and more innovation generally. A key theme in the discussion centred on the role of consumer contracts in the supply of financial services, and it was clear there needs to be more discussion on the tension between regulation, contracts and product information. 

Of course, the starting point was that lengthy consumer contracts are 'silly' - a point made by John Kay last year and discussed on the SCL blog. But it's important to recognise that contracts act as a layer between law and regulation and the information a consumer sees when buying and using a financial service. They represent a service provider's public statement of how it interprets the law and regulation to apply to its service. That statement is critical not only for consumers themselves, but also for the courts and many stakeholders on whom consumers rely to protect them (indeed governments have even deputised global service providers as private sheriffs, relying on violations of their terms of service to 'shut down' Wikileaks, for example). In addition, financial instruments - loans, bonds, shares - that are agreed or traded in the course of using most financial services are themselves simply sets of terms and conditions.

The reason consumers are confronted by such terms and conditions is that the courts have insisted that consumers must be given an opportunity to read and agree them if they are to govern the customer relationship. It is this interactive process of offer and acceptance that produces an enforceable "contract" (along with some form of 'consideration'). Unless and until Parliament changes the basis for establishing contract law in the UK, we're stuck with that approach. 

Yet this morning it was suggested that a consumer should not even need to the opportunity to read and agree terms and conditions in order to benefit from them. Revolutionary stuff, unless you live on the continent, where a lot more of what we see as contractual terms are embedded in civil codes. This of course removes a lot of commercial flexibility, and means the market moves at the speed of law and regulation... which would undermine the FCA's object of promoting innovation.

Of course, the financial services sector is arriving late to the debate about how to enable consumers to properly agree and understand the substance of a contract without necessarily drilling into the fine print unless they so wish. The intellectual property community came up with the Creative Commons licensing model in 2001 and, more recently, the World Economic Forum has been trying to foster a similar approach to the use of personal data.

But the critical issue in every case is whether the simplified summaries that consumers see and agree actually reflect the terms and conditions on which a firm says it is doing business; whether those terms and conditions are consistent with applicable law and regulation; and, finally, whether the firm's business processes and computers actually operate on the same basis. Here we run into the tension between Big Data and the growing array of technology that puts you in control of Your Data - data about you, or which you generate in the course of your activities.

This is certainly not an area where the FCA can go it alone, and it's great to see their representatives (not to mention someone from the Treasury) participating in open debates such as the one this morning.