Banks and finance companies frequently come under fire for producing documents which are difficult to understand. In the consumer arena this runs contrary to a number of legal and regulatory requirements, as demonstrated by a recent case heard by the Court of Justice of the EU (CJEU).
The case concerned a consumer finance agreement which omitted the annual percentage rate of interest (or APR). Whilst the agreement didn’t specify a rate of interest, it did include the formula by which the APR could in theory be calculated. Unfortunately the formula is so complex that it needs a computer program to work it out with any degree of accuracy. The CJEU reached the conclusion that the failure to mention the APR in the credit agreement may be a decisive factor in assessing whether the terms of the agreement are drafted in plain, intelligible language.
Where an agreement is subject to regulation by the Financial Conduct Authority (FCA) there are numerous instances where the FCA’s rules require lenders to operate in a transparent way. Sitting at the top of the FCA’s hierarchy of controls are the Principles for Businesses. Principle 7 deals with communications with customers and provides that, “A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading.” Many of the individual rules in the FCA’s Handbook require lenders to use “plain, intelligible language” in their documents. Examples include the terms of continuous payment authorities (such as direct debits) and the wording of letters, emails and adverts.
In the case of retail banking services (including deposit accounts) the rules require information to be provided “in easily understandable language and in a clear and comprehensible form…so that the banking customer can make decisions on an informed basis”. Similar requirements apply in the world of mortgages where firms “must make available clear and comprehensible information about MCD regulated mortgage contracts at all times”.
So the use of plain English and clear documents isn’t optional for regulated financial products – clarity and transparency is something that the regulator expects. It also represents good practice in the non-regulated arena. Some of the tools to help achieve this are:
- using plain English
- avoiding jargon and legalese
- keeping sentences short
- using active verbs rather than passive ones
- using “we” and “you”
In the internet age it would be good to see lending documents drafted in a modern, business-like style. Apart from anything else, borrowers appreciate not needing a dictionary, thesaurus or babel fish to understand them.
This blog post was written by partner Philip Alton. For further information, please contact:
Philip Alton, partner, Financial Disputes & Regulation team
T: 0121 234 0076
 EOS KSI Slovensko s.r.o. v Ján Danko and Margita Danková (Case C 44817) EU:C:2018:745
 CONC 4.6.5R
 CONC 3.3.2R
 BCOBS 4.1.1R
 MCOB 3B.1.2R