BY Aslam Moosajee , Jessica Blumenthal AND Joshua Davis
banking and finance
Conduct Standard for Banks and consumer protection: what do unfair contract terms mean for banks and other financial institutions?
While it is not clear when the financial services industry can expect the next draft of the Conduct of Financial Institutions Bill (“COFI”) to be published, the recently promulgated Conduct Standard for Banks has leapfrogged COFI, accelerating many of its draft principles.
One of these principles includes the requirement that retail financial customers not be subjected to “unfair” contract terms. This has been enacted as section 5(1)(d) and 5(2) of the Conduct Standard. This section seeks to protect retail financial customers (including pension funds and other member-based pools of capital) when contracting with a bank (or once COFI is enacted, any financial institution) by prohibiting terms, conditions and requirements that are “unfair”.
This legislative protection of consumers has been a popular trend since the enactment of the Consumer Protection Act, 2008 (the “CPA”), which provides consumers with a right to fair, just and reasonable terms and conditions. Under the CPA, suppliers may not require consumers to waive any of their rights, assume any obligations or waive any liability of the supplier on terms that are “unfair, unreasonable or unjust.” The CPA specifies that a term or condition of an agreement is unfair, unreasonable or unjust if, for example, it is excessively one-sided, the terms are inequitable or if the consumer relied upon a misleading representation to their detriment. The CPA also specifies that notices or provisions that purport to limit the liability of the supplier, oblige consumers to assume liability, impose an obligation on the consumer to indemnify the supplier or any acknowledgements of fact by the consumer, must be drawn to the attention of the consumer in a conspicuous manner and must be written in plain language.
The CPA provides a list of transactions and terms and conditions that are prohibited, such as a transaction that defeats the purposes of the CPA, misleads the consumer or deprives a consumer of any right under the CPA. In addition, regulation 44 to the CPA provides a “grey list” of terms that are presumed to be unfair and unreasonable. This list includes limiting the liability of the supplier for death or personal injury or restricting the consumer from relying on the defence of prescription.
The National Credit Act, 2005 (the “NCA”) similarly provides a detailed list of provisions that are unlawful and may not be included in credit agreements. This list is akin to that found in the CPA as it includes:
- provisions that defeat the purposes of the NCA;
- purport to deprive a consumer of any right in the NCA;
- avoid a credit provider’s obligation in terms of the NCA;
- waive any common law rights applicable to credit agreements; or
- exempt the credit provider from liability.
The NCA further contains prohibited provisions specific to credit agreements, such as provisions that express an agreement by the consumer to forfeit money to the credit provider, a granting of a power of attorney in advance to the credit provider and a consent to a pre-determined value of costs relating to enforcement of a credit agreement. Like the CPA, the NCA is specific as to the types of provisions that are considered to be unlawful and may not be included in consumer agreements.
While sections 5(1)(d) and 5(2) of the Conduct Standard relating to unfair contract terms have been modelled on the terms set out in the CPA and NCA, these provisions are framed with less specificity. Section 5(1)(d) requires a bank to ensure that the terms, conditions and requirements in a contract between the bank and its retail financial customer are not unfair. Section 5(2) clarifies that, without limiting the prohibition in section 5(1)(d), a term, condition or requirement in a contract will be unfair if it:
- would cause a significant and unreasonable imbalance in the parties’ rights and obligations under the contract;
- is not reasonably necessary to protect the legitimate interests of the financial institution, who would be unduly advantaged by the term, condition or requirement;
- would result in an unfair outcome (financial or otherwise) to a retail financial customer if it was applied or relied on;
- unreasonably require a retail financial customer, whether as a condition to enter into a transaction or otherwise to:
- waive any right; or
- absolve the bank of any obligation or liability.
These provisions do not provide a “grey list” of presumptively unfair or unreasonable terms or a list of prohibited terms, as is the case in the CPA and NCA. As in the context of the NCA and CPA, courts can rely on the regulations or lists of prohibited terms, and an analysis of what constitutes a fair and reasonable contractual term can largely be avoided. This is not possible in the context of the Conduct Standard and given the lack of specificity, it may prove difficult to predict when the Financial Sector Conduct Authority (the “FSCA”) or the courts will declare a term of a contract between a bank and its retail financial customer void by reason of non-compliance with section 5(1)(d) of the Conduct Standard.
The FSCA and the courts will need to give meaning to phrases such as “significant and unreasonable imbalance” and will need to determine a principled basis for determining when a contractual provision is “not reasonably necessary to protect the legitimate interest of the financial institution”. Guidance may be sought in foreign jurisprudence. The Australian Securities and Investment Commission Act, 2001 (the “ASIC Act”), which regulates contractual terms in relation to financial services in Australia, contains a provision markedly similar to section 5(2) of the Conduct Standard. Australian case law on the ASIC Act may therefore provide a means of interpreting this section. A further useful interpretive guide is the South African case law in respect of restraint of trade agreements, which assesses the legality of such agreements in terms similar to those contained in section 5(2).
“Significant and unreasonable imbalance”
In respect of the phrase, “a significance imbalance in the parties rights”, Australian Courts have explained that “[i]t is useful to assess the impact of an impugned term on the parties’ rights and obligations by comparing the effect of the contract with the term and the effect it would have without it” [Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd  FCA 1224]. In assessing whether an imbalance exists, the courts have noted that a relevant consideration is “if the contract gives one party a right without imposing a corresponding duty, or without giving any substantial corresponding right to the counterparty”.
The courts have held that “[a] term is less likely to give rise to a significant imbalance if there is a meaningful relationship between the term and the protection of a party, and that relationship is reasonably foreseeable at the time of contracting. It has however been cautioned that “[t]he fact that a party might profit from breaches of contract by a customer, without the customer in breach acquiring something in return, would not alone be sufficient to allow it to be concluded that the term caused a significant imbalance in the parties’ rights and obligations arising under the contract”.
“Not reasonably necessary”
In Basson v Chilwan 1993, Nienaber JA held that, in assessing whether a restraint of trade agreement is reasonable and therefore lawful, a court is required to the weigh up, qualitatively and quantitatively, the relevant interests of the parties. Where the importance of the purpose sought to be achieved by the restraint is outweighed by its effect on the interests of the affected party, the restraint is deemed unreasonable and unlawful. Similarly, in applying section 5(2)(b) of Conduct Standard, a court should be required to weigh the importance of the legitimate interest sought to be protected by the financial institution against the effect of the impugned provision on the retail financial customer. Where the importance of that interest is outweighed by the effect of the provision on the retail financial customer, the provision will likely be deemed unreasonable.
Further guidance as to the correct interpretation of 5(2)(b) of Conduct Standard is found in Reddy v Siemens Telecommunications (Pty) Ltd, where Malan AJA held that as part of the inquiry into the legality of a restraint of trade agreement, a court is required to determine whether “the restraint goes further than necessary to protect the interest”. Malan AJA held further that such an inquiry corresponds with the section 36(1)(e) leg of the Constitutional limitations analysis which requires an assessment of whether less restrictive measures are available to achieve the purpose of the limitation. Where less restrictive means are available and are not overly burdensome to the impugned party, the limitation is regarded as disproportionate and thus unlawful.
Given the language used in section 5(2)(d), the FSCA and the courts may adopt the inquiry suggested in the Reddy case in interpreting this section. In particular, a court would presumably assess whether less restrictive means are available for the achievement of the purpose of the impugned provision. Where such means are available and fulfil the purpose of the provision, the provision is not necessary to the protection of the financial institution’s interests. Where such alternative means are not overly burdensome to the financial institution, the impugned provision is not reasonably necessary.
The introduction of regulations outlining terms that are to be presumed unfair in terms of the Conduct Standard would bring welcome certainty to its application. Failing the introduction of such regulations, the FSCA and the courts are likely to take guidance from the domestic and foreign jurisprudence outlined above.
In light of this, all banks (and in preparation, all financial institutions) should assess the terms, conditions and requirements of the contracts that they conclude with retail financial customers and pre-emptively consider whether such include clauses which create a “significant and unreasonable imbalance” in the parties rights and obligations under the contract. For example:
- consider whether a contract gives one party a right without imposing a corresponding duty, or without giving any substantial corresponding right to the counterparty;
- if a term has been included to protect a legitimate interest then this should be confirmed in the contract so that it is clear upon a proper interpretation of the contract that there is a meaningful relationship between the term and the protection of such legitimate interest and that this was foreseeable at the time of contracting; and
- it should be considered whether less restrictive means could be utilised to protect the legitimate interest of the financial institution.
For any assistance in this regard please contact:
Executive | Dispute Resolution
+27 82 461 5917
Executive | Banking and Finance
+27 82 788 0352
Candidate Attorney | Dispute Resolution
+27 72 608 6733