The watchdog has issued a Statement of Good Practice about fairness of contract terms as part of its work to help retail customers achieve a fair deal, one of its three business priorities.
One area of particular concern is contracts which give a firm unilateral power to vary charges after the contract has been signed, so-called "variation clauses". These often apply to interest rates on savings and deposit accounts and residential mortgages, and to premiums for certain life and long term health insurance contracts such as critical illness and long term care policies.
Anna Bradley, FSA Director Retail Themes, said: "Contracts define the terms of the deals customers get, but for the most part customers have no influence over what goes into them. The law requires firms to use contract terms that are fair and our Statement sets out how firms might go about achieving this.
"Being fair is all about getting the right balance between the firm and the consumer. For example the power to vary insurance premiums in long-term health contracts is not inherently unfair and consumers may benefit from a lower premium. But the contract cannot be so one-sided that the firm can then do as it pleases when it is reviewed. When first taking out the contract consumers need to know the reasons why the premium charged might change and whether and when they will be told about that change.
"Where we have considered a term to be unfair, we have obtained an undertaking from the firm to cease to apply the term and to amend it for the future, and we have then published that undertaking on our website."
The Statement has been produced in the context of the FSA’s role as Qualifying Body (enforcement authority) for financial services firms under the Unfair Contract Terms Regulations. In keeping with the FSA's preference for principles-based regulation, it does not introduce any new rules.
