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Current law on fairness in consumer contracts contains a loophole that may be harmful to consumers, according to consumer watchdog the Office of Fair Trading (OFT). Businesses should be more restricted in their freedom to charge ancillary fees, it says.

The OFT has expressed (pdf) its views in a response to a consultation (pdf) by another government department, the Department for Business, Innovation and Skills (BIS). The OFT said that forthcoming reforms to consumer laws should change the rules on ancillary price terms.

The Unfair Terms in Consumer Contracts Regulations of 1999 provide that, generally, unfair terms in consumer contracts shall not be binding on consumers. They contain an exemption, though. Regulation 6 says that the assessment of fairness of a term shall not relate "to the definition of the main subject matter of the contract" or "to the adequacy of the price or remuneration, as against the goods or services supplied in exchange."

In November 2009, the Supreme Court ruled that bank charges in relation to unauthorised overdrafts were part of the price in exchange for the provision of the whole package of banking services received by a customer. They were therefore excluded from assessment under the 1999 Regulations.

The OFT had brought that case against Abbey National and various other banks. It had argued that the essential bargain between the bank and its customer constitutes only so much of the contract as the consumer can be said to have consented to freely. The Supreme Court disagreed. It said that provided the banks’ terms were set out in plain intelligible language, it was not open to the OFT to assess the level of the charges for fairness under the Regulations.

Meanwhile, a High Court decision just before the bank charges ruling took an opposing view. It found certain charging terms in letting agency agreements used by estate agents Foxtons to be unfair. The High Court left open the possibility of an appeal if the judgment on bank charges supported a contrary view, but Foxtons did not appeal that ruling.

As a result of these rulings, there is uncertainty as to how UK legislation on unfair terms in consumer contracts applies to charges that are 'contingent', or 'ancillary' to the core of the contract.

In July, BIS consulted on the need for legislative change, in particular to address perceived unfairness in certain bank charges. The EU Consumer Rights Directive is currently being negotiated, and it will replace the current rules on consumer contracts.

BIS noted in its consultation: "The 2008 Commission proposal [for the new Directive] does not specifically address the point of ancillary or contingent charges in a way that clearly engages with the Supreme Court ruling (which came afterwards), but the Commission is aware of the ruling and may seek to address its outcome in any revised proposal."

BIS's consultation, which closed last Monday, will inform the government's negotiations on the Directive in Europe. It asked for examples of other ancillary costs, which it distinguished from those costs that are hidden.

"This call for evidence is not about how to deal with charges that are straightforwardly concealed from the consumer at the time the contract is concluded, or with charges that are in unintelligible jargon," it said in its consultation paper. "The former are not enforceable under ordinary English contract law in any event, and charging terms which are not in plain language are specifically said by the [1999 Regulations] to fall within the scope of the test of fairness.

"This call for evidence is instead about charges which are – because of the way they are presented, or the way the contract works – objectively difficult for an ordinary person in practice to assess effectively when reaching their decision as to whether to enter a contract," said BIS.

The OFT provided BIS with other examples of ancillary costs. It cited fees charged by retirement homes when residents sell or rent their properties and a complaint received about conditions attached to Manchester United season tickets.

The OFT has told BIS that the new Directive should consider more than just the use of plain English in assessing fairness.

"The key issue is transparency, understood in a broader sense than just plain and intelligible language, and whether charges are likely to be noticed and understood by consumers at the time of entering the contract," said the OFT.

"In our view this is more important than deciding whether they fall into particular descriptive categories such as 'contingent' or 'ancillary'," it said.

The OFT said that charges that are not transparent may harm consumers by making them pay more than they expected. "They may not have entered the bargain had they known about the charges and been able to correctly anticipate the likelihood of the need to pay them," it said.

The OFT said this "can reduce the beneficial effects of competition on price because consumers cannot easily compare prices, thereby reducing businesses' incentives to offer low overall prices".

The OFT said the new Directive should put four key principles beyond doubt:

1. The price exemption should focus on 'core' pricing issues. It should only cover as much of the price as forms part of the essential bargain between the parties.
2. The interpretation of what is the essential bargain should also be about more than plain and intelligible language. Even if all remuneration terms meet transparency requirements and consumers read such terms, it will not necessarily follow that consumers will consider all detailed payments.
3. The interpretation of what is the essential bargain must incorporate and reflect the consumer's perspective.
4. Ancillary price terms, and essentially those payable on a contingency not likely to be foreseen by the consumer, should not benefit from the exemption./ol>

The OFT said any exclusion from the price exemption provision should be drafted "in a way that invites the courts to consider the reality of the situation for consumers."

"Evidence could be adduced on how far consumers are able and likely in practice to factor the charges into their initial decision to enter the contract," it said.

Another key factor is "the perspective and circumstances of the typical or average consumer, and whether, in the context of the ordinary pressures and constraints of modern life, consumers actually do factor these charges into their initial purchase decision," said the OFT.

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