The FSA states in the guidance that it is concerned at the number of unfair clauses it comes across in consumer contracts, such as rights to unilaterally alter or terminate a contract, rights to transfer obligations under a contract and contractual terms that are not in plain English. Whilst the FSA’s guidance is intended only for firms regulated by the FSA, it is a useful reminder to everyone involved in commerce as to what unfair terms are and how businesses can avoid imposing an unfair term on a consumer. The FSA can take action against businesses registered with it for unfair contractual terms, for example by obtaining a court injunction to prevent an unfair term being used any further by the business. The Office of Fair Trading (OFT) can also take action in the wider market place against offending practices.

The FSA sets out that, if a business can specify a valid reason within the contract itself as to why terms might be unilaterally altered, the right to unilaterally alter the contract is less likely to be considered unfair. A right of alteration is unlikely to be valid if it is, for example, in the business’s absolute discretion or to cover “unexpected” costs. In addition, stating that the contract can be altered “for any valid reason” will not be enough. If a business does alter a term that has a significant impact on the consumer’s obligations under a contract, such as varying charges payable by the consumer, the consumer should be informed of the change as soon as possible and given the chance to terminate the contract with immediate effect, without charge or other “practical” barriers put in place by the business to prevent the contract coming to an end.

Similarly, in relation to the transfer of obligations to third parties, the business should make sure that the guarantees provided to the consumer by the third party are the same as or better than those offered by the business itself – they key is stability and certainty for the consumer. The guidance states that consumers should be adequately informed of any transfer in good time for the consumer to fully understand the impact on the contractual relationship.

Simon Weinberg, a solicitor in the Commercial/IP/IT team at Matthew Arnold & Baldwin and assistant editor of Upload-Commercial/IP/IT, commented, “This guidance, whilst useful, does not necessarily tell us anything new. It is an important reminder for businesses of the requirement to have contractual terms that do not unfairly prejudice the consumer. It is not just the risk of an injunction to prevent the future use of those terms that should be taken into consideration – in addition, businesses should remember the bad press that can come with an injunction and the knock-on effect on consumer goodwill to an offending business. At a time when margins are tight and goodwill is essential to survival in the marketplace, getting contractual terms in order is an easy way to avoid the risk of an FSA or an OFT investigation, and all the reputation damage that can come with it.”

The letter can be found here: http://www.fsa.gov.uk/pubs/guidance/gc11_13.pdf.

The Court accepted that it may be the position to dispense with cross undertakings in relation to respondents but not innocent third parties.  The Court therefore ordered that when a law enforcement body is seeking through the civil Courts to enforce the law by way of a freezing injunction, which may have adverse financial implications for third parties who are innocent then as a matter of course, the usual third party undertaking as to damages should be given.

This should be dealt with at the hearing for the injunction and should not be for a third party to have to come along to court later and seek the protection. 

The Court would not enforce that third party undertaking, however, if the third party was not entirely innocent. If there were special reasons as to why the cross-undertaking in damages should not be enforced, then those can be considered when the third party seeks to enforce the undertaking.  The better approach is to require the undertaking in the first instance and then to consider whether there is or is not reason to enforce it in an appropriate case. 

Accordingly the Court ordered the usual cross-undertaking in damages in the standard form in favour of third parties and this extended to the Bank.

This is positive news for banks facing freezing injunctions made by law enforcement regulators or public enforcement authorities.

Financial Services Authority and Sinaloa Gold Plc and two others [2011] EWHC 144

In addition, an agreement made by a person in the course of carrying on a regulated activity in contravention of the general prohibition is unenforceable against the other party. However, section 28 (3) provides that if the court is satisfied that it is just and equitable in the circumstances of the case it may allow the agreement to be enforced.  Section 28 (5) states that the issue is whether the person carrying on the regulated activity concerned reasonably believed that he was not contravening the general prohibition by making the agreement.

On the facts of this case, it was held that the making of the loan and charge to Mr Helden by Strathmore Ltd (Strathmore) was a regulated mortgage.  At first instance, the Judge held that it would be just and equitable to permit Strathmore to enforce the charge and the obligation to repay the loan together with two increases in the rate of interest agreed in 2007.  In reaching his decision the Judge took into account that Strathmore employed solicitors to represent them in connection with the loan for the purchase of the land and those solicitors did not inform them that FSMA was applicable.  The financial services legislation had not until quite recently extended to any mortgages.  They did not usually enter into transactions where FSMA applied.  Other factors the court took into account were as follow: 

• The mortgagor, Mr Helden had had the use of the property since 2006 without making any rent or interest payments;
• The property had increased substantially in value.  It was bought for £1 million and it was suggested that it should be marketed at £1.8 million.  The loan from Strathmore thus enabled Mr Helden to achieve a large profit;
• Strathmore would not have been willing to make the loan on an unsecured basis;
• Strathmore could be expected to have generated a return on the £1 million by investing it elsewhere had it not been lent to Mr Helden;
• There was no question of Mr Helden having been taken advantage of.  He had considerable experience in property matters including as a mortgage broker.  The rates of interest were agreed with Mr Helden and were not exorbitant;
• Mr Helden preferred not to pursue alternative funding because of his concern that he should be able to make lump sum repayments without penalty;
• Mr Helden did not identify respects in which he would have been better placed if Strathmore had been an authorised person;
• Strathmore did not realise that FSMA could apply and it was reasonable for them not to do so.

There was some debate in the Court of Appeal over whether a person could rely on section 28 (5) and contend that they reasonably believed that they were not contravening the general prohibition by making an agreement if they were wholly unaware of the existence of the prohibition at the time of the agreement. However, the Court of Appeal concluded that it was unnecessary to decide this issue.  Strathmore could rely on section 28 (3) even though it had contravened FSMA by entering into the charge because it was nonetheless just and equitable to permit Strathmore to enforce its charge.

This case provides a useful example of the sort of circumstances and the factors the court will consider when deciding whether it would be just and equitable to enforce a charge despite a contravention of FSMA.

Charles Helden v Strathmore Ltd [2011] EWCA Civ 542

Facts

Mr Calvert was a partner and trader at the stockbroking firm Cazenove.  He passed inside information relating to shares in six different companies to Mr Hatcher who proceeded to invest in those companies, resulting in a net profit of over £100,000. Mr Calvert and Mr Hatcher then split the profit between them.

The FSA entered into an agreement with Mr Hatcher whereby in exchange for his cooperation with the FSA, including standing as a key witness, the FSA agreed to sanction Mr Hatcher using its regulatory powers rather than via a criminal prosecution. Mr Hatcher’s fine was also substantially reduced but nonetheless still amounted to £56,098.

Comment 

The convictions are interesting as the FSA’s director of enforcement and financial crime specifically stated that the FSA will continue to enter into similar agreements with defendants where it believes that such agreements will result in valuable evidence for convictions being produced.

The convictions are also examples of the continued efforts by the FSA to crack-down on illegal activity in the financial markets, perhaps increased by the wide media criticism of the perceived failure by the FSA to control such markets in the past.  It will be interesting to see if any reallocation of the roles of the FSA and the Bank of England following the general election this summer has any further effect on the prosecution of such crimes.

 The key arrears proposals:

• Make plain that firms must not add early repayment charges on arrears charges and interest levied on those charges;
• Clarify that firms must not apply a monthly arrears charge where the firm and the customer have agreed an arrangement to repay the arrears;
• Compel firms to consider all options for borrowers.  Repossessions should always be the last resort;
• Confirm that payments by customers in financial difficulties must first be allocated to clearing the missed monthly payments, rather than to arrears charges, which can be repaid later; and
• Oblige firms to record all arrears handling telephone calls and to keep all records for three years.

Background

On 3 occasions in the summer of 2004 Mr Patel placed a series of spread bets on listed companies. The FSA claimed that Mr Patel was only able to place such bets on the basis of restricted information provided to him by Mr Chhabra, as the relevant information was not generally available to the public.

At the time the bets were placed, Mr Chhabra was a research analyst at Evolution Securities Limited, covering Ebookers plc and Eidos plc. Mr Patel was his friend and an experienced spread better. Mr Chhabra became aware of restricted information relating to Ebookers plc and Eidos plc and he passed it on to Mr Patel. Mr Patel placed bets on these companies shortly after receiving such information. Mr Patel profited to the sum of £85,541 from the bets.

FSA decision

In November 2008 the FSA issued a Decision Notice on Mr Chhabra and Mr Patel notifying them that the FSA had decided to impose penalties on them for market abuse. The FSA also prohibited them from performing functions in relation to any regulated activities. Both Mr Patel and Mr Chhabra denied that they had engaged in market abuse and referred the Decision Notice to the FSMT.

FSMT decision

Mr Chhabra admitted to the FSMT that, with hindsight, it could appear suspicious to communicate with a third party while in possession of restricted information but argued that this was not evidence of wrong-doing. However, after having considered the evidence as a whole, the FSMT upheld the FSA’s findings that Mr Patel’s bets had been placed on the basis of the restricted information passed to him by Mr Chhabra. Both Mr Chhabra and Mr Patel had therefore engaged in market abuse. A separate FSMT hearing will consider whether the penalties and prohibition imposed by the FSA are appropriate.

Comment

In its decision the FSMT explicitly stated that it regards allegations of market abuse as serious allegations. This decision shows that market abuse will not be tolerated by the FSA or the FSMT and should serve as a warning to anyone in a similar position to Mr Chhabra or Mr Patel who is tempted to engage in abusive practices.

Robin Chhabra and Sameer Patel and FSA

The proposals, published in the mortgage market review discussion paper, reflect the FSA’s changed approach to a more intrusive and interventionist style of regulation.

The review’s key features are:

• Imposing affordability tests for all mortgages and making lenders ultimately responsible for assessing a consumer’s ability to pay;
• Banning ‘self-cert’ mortgages through required verification of borrowers’ income;
• Banning the sale of products which contain certain ‘toxic combinations’ of characteristics that put borrowers at risk;
• Banning arrears charges when a borrower is already repaying and ensuring firms do not profit from people in arrears;
• Requiring all mortgage advisers to be personally accountable to the FSA; and
• Calling for the FSA’s scope to cover buy-to-let and all lending secured on a home.

The FSA now has the responsibility for retail banking conduct of business regulation and it will apply its Principles for Businesses and a new Banking Conduct of Business Sourcebook (BCOBS). The Banking Code Standards Board (BCSB) will become the Lending Standards Board (LSB), the body responsible for monitoring and enforcing the new Lending Code which now covers conduct of business standards for banks and other financial institutions providing credit products (including overdrafts, unsecured loans and credit cards) to personal and small business customers.

The FSA has published information on the new regime and BCOBS, including training and supporting materials, and Q&As on the application, scope and requirements of BCOBS.