Consumer Rights Act 2015 receives Royal Assent – what do insurers need to know?

The Consumer Rights Act 2015 (the Act), which applies to consumer insurance contracts, received Royal Assent on March 26. The Act will reform and consolidate consumer law in the United Kingdom (UK). For insurers offering consumer products the main impact of the Act is likely to be seen in the new laws for digital content and ancillary contracts, unfair contract terms and the changes to the mechanisms for consumer redress.

The Consumer Rights Act 2015 complements but is distinct to the measures introduced by the European Consumer Rights Directive.

For most firms the new consumer law will not have a significant impact on their business. Many of the measures reflect much of the Financial Conduct Authority (FCA) best-practice in terms of policy wording and Treating Customers Fairly. But this is a major piece of legislative reform that does introduce some changes that insurers should be aware of. In particular firms should be aware of the introduction of rules to ensure that digital content is fit for purpose, changes to consumer cancellation rights and the requirement to make all potentially onerous core terms ‘prominent’. We provide an overview of the main changes and how they may apply to insurers below.

Existing consumer law in the UK is complex and now outdated, especially where digital business is concerned. Most existing consumer legislation is over 30 years old and came onto the statute books during a time when retail business was very different to the present and certainly long before online trading was conceivable.

“Consumers struggle to enforce their rights because UK consumer law is unnecessarily complex, ambiguous in places, and has not kept up with technological developments.” (Gov.uk)

There are a number of overlaps between the existing pieces of legislation as consumer law has generally developed in a piecemeal fashion and a number of statutory provisions are to be repealed by the Act¹. In addition, UK law has developed alongside increased EU legislation which has not in all cases been consistent with UK consumer law.

The Consumer Rights Act 2015 forms the centrepiece of UK consumer law reform. The Government has supported the introduction of reform measures in order to boost consumer confidence.

The Consumer Rights Directive

The Consumer Rights Directive (2011/83/EC) is a European measure aimed primarily at tackling distance and doorstep sales but also with a scope extending to other discrete areas of consumer law. The Consumer Rights Directive was implemented in the UK through the Consumer Contracts (Information, Cancellation and Additional Payments) Regulations 2013 (SI 2013/3134) (the Regulations) and the Consumer Rights (Payment Surcharges) Regulation 2012 (SI 2012/3110).

Financial services, including insurance, were excluded from the Consumer Rights Directive subject to the exception mentioned below, as it was successfully argued that they were already subject to robust consumer protection measures. The exceptions are that warranties, credit agreements and insurance offered in conjunction with the sale of non-financial goods or services must meet the requirements under the Regulations for cancellation of ancillary contracts and additional payments not being a default (or ‘pre-ticked’) option. For example, where insurance is sold alongside a purchase (such as a travel or concert ticket) two aspects of the Regulations implementing the Consumer Rights Directive will apply.  If the consumer cancels the contract for the primary purchase the ancillary insurance contract will also need to be cancelled. Also, the express consent for additional payments will apply which means the consumer must actively agree to the payment – for example by ticking the relevant box. The ancillary insurance product must not be a default contractual option with the primary purchase.

A further measure being introduced under the Consumer Rights Directive is the prohibition of the use of premium rate customer phone numbers. Although not directly a requirement for financial services firms, the FCA has indicated that financial services firms will be held to a similar requirement.

The Consumer Rights Directive introduces for the first time a concept of digital content and new rules governing the cancellation of content such as ‘apps’, downloads or programmes. Insurers who are increasingly using smart technologies in order to help lower insurance premiums, for example in private motor insurance, will need to ensure that these apps comply with the Regulations. Insurers will need to confirm confirmation of a purchase of an app in a durable medium. The burden of proof that suitable information has been provided to the customer rests with the firm. The requirement to provide confirmation of the purchase in a durable medium should enable the customer to access information directed personally to them, in an unchanged format for as long as they might reasonably need it. Firms should provide a full description of the goods or service purchased including their full price. Customers will not be able to cancel the contract once the digital content has been downloaded so long as the trader has informed the customer and received explicit consent that this is accepted.

Where a consumer cancels the primary contract, the Consumer Rights Directive requires that any ancillary contract – including for example cancellation cover – is also cancelled. When the consumer cancels, the primary supplier is obliged to inform the provider of any ancillary contract that the primary contract has been cancelled.

The Consumer Rights Act 2015

Aspects of the Act relevant to insurers:

• Digital content: Digital content supplied to a customer (or supplied for free alongside another service) should be of satisfactory quality according to the expectations of a reasonable person. This will be a flexible standard with the result that the expectations will vary depending on the usage of the app. For example, although a smart motor insurance app might be provided free alongside the underlying insurance cover, the app’s value to the customer is significant as it forms part of how the customer’s risk profile is formed. All digital content should be fit for purpose. Accordingly, insurers will need to ensure that there is continued access to digital content and that customers have a right to repair or rights to a price reduction if the content ceases to be accessible for significant periods of time. The Act also provides for remedies where digital content causes damage to consumer devices such as mobile phones or tablet computers.
  
  
• Services: The provisions relating to the supply of services by a trader to a consumer apply except to the extent that the service is subject to legislation providing for more extensive consumer rights. The Act does not provide any express exclusion covering any sector with the exception of contracts of employment or apprenticeship. Accordingly, financial services laws and regulatory provisions apply alongside, or instead of, the Act. As the Financial Services and Markets Act 2000, common law and the Regulatory Handbook provide ample consumer protection measures it is expected that there will be limited scope for the Act to apply to consumer insurance policies. However, it is our view that there are some areas where the Act arguably provides a higher standard of consumer protection and therefore may be applied. One example is the requirement in the Act to perform a service within a reasonable time. Currently, the Insurance Conduct of Business Rules provide only that claims be paid ‘promptly’. A breach of the Act would provide consumers with a greater remedy than would be available for a regulatory breach under the Regulatory Handbook.
  
  
• Unfair contract terms. The Act both consolidates and clarifies existing consumer legislation on unfair contract terms, removing conflicting overlaps between the Unfair Contract Terms Act 1977 and the Unfair Terms in Consumer Contracts Regulations 1999. The provisions cover both ‘consumer contracts’ and ‘consumer notices’ (which may be either written or oral). A consumer notice includes announcements and other communications intended to be read by a consumer; renewal notices and customer promotions will therefore be caught.
  
  The Act does not reform the essential position currently applied to contracts of insurance that core terms such as exclusions cannot be assessed for fairness. Under the Act a term may only be excluded from an assessment for fairness where it is both transparent and prominent. A term is transparent where it is expressed in plain and intelligible language and (when written) is legible. The prominence of the term will be determined by how it was brought to the consumer’s attention (in such a way that the average consumer would be aware of it). An average consumer is one who is ‘reasonably well-informed, observant and circumspect’. Clearly therefore, onerous exclusions will need to be prominently set out in order to avoid an assessment for unfairness.
  
  New additions to the ‘grey list’ of terms presumed to be unfair include:
  
  
  • disproportionately high charges where the customer decides to cancel the contract;
  • terms enabling the firm to determine the characteristics of the subject matter of the contract after the conclusion of the contract; and,
  • terms allowing the trader to determine the price after the consumer is bound by the agreement.
    
    
• Enhanced enforcement powers. Currently, if an insurer has been found to use policies containing unfair terms or has been found to breach consumer law the Competition and Markets Authority or the FCA may require an undertaking to amend the term. They may also bring injunctive action to prevent further use of the terms. The Act introduces enhanced measures which amend the Enterprise Act 2002. These include redress measures such as: compensatory payments to consumers who have suffered as a result of the use of unfair terms; enabling customers to terminate a contract; and, where a consumer cannot be identified, measures taken for the collective interest of consumers. The Act also extends the bodies who may act as private enforcers, specified as such by the Secretary of State. Private enforcers are expected to include consumer representative organisations.

The Act makes it simpler for consumers and small businesses to get redress where a business has breached competition law. The ability with which consumers can bring private actions in order to seek redress for anti-competitive behaviour is generally regarded as an important compliment to consumer rights law. Under the existing Enterprise Act 2002 certain bodies were given the power to bring damages claims on behalf of consumers on an ‘opt-in’ basis. As only one such action has ever been commenced, it is thought that existing measures have failed to provide a suitable consumer redress mechanism.

The Act enables consumers to bring collective actions before the Competition Appeals Tribunal (CAT) rather than relying upon private actions in the High Court. Consumer claims may be brought on a collective basis where they raise ‘same, similar or related issues of fact or law’. Importantly, the Act enables such claims to be brought on an ‘opt-out’ basis. Members of a class will be automatically selected and will have to opt-out if they do not wish to join the action. There are certain limitations to safeguard the process against vexatious or unmeritorious claims: the CAT must certify claims as suitable; only UK consumers will be automatically opted in; exemplary damages cannot be awarded; and, the principle of loser pays costs will be retained.

The following table sets out the main areas that insurers should address in preparation for the Act.