Unfair contract terms: FMCA power enables FMA to seek court declarations

The Regulatory Systems (Economic Development) Amendment Act 2025 will amend the Financial Markets Conduct Act 2013 (FMCA) to give the Financial Markets Authority (FMA) a new power to seek declarations from a court that terms in “FMC standard form contracts” are unfair. Until now, the Commerce Commission has been the sole regulator with this power.

This change highlights the importance of considering the unfair contract terms regime when preparing, updating or amending standard form documentation (including, for example, product disclosure statements).

 

What contracts are captured?

The FMA’s new power (and the Commerce Commission’s existing power) will apply to “FMC standard form contracts”.

“Standard form contracts” are contracts usually prepared in advance by one party, used repeatedly, offered on a minimal-negotiation basis and typically accepted without substantive changes.

An “FMC standard form contract” is a standard form contract to the extent it is for:

• the supply of a financial service; or
• the acquisition or disposal of a financial product.

This would include product disclosure statements, financial advice provider client agreements, and certain contracts of insurance.

The regime will also apply to certain small trade contracts to the extent they do not form part of a trading relationship that exceeds an annual value threshold of NZD250,000. Contracts with service providers (for example, for the distribution of financial products) may be standard form small trade contracts.

 

Who is affected?

The amendment will apply to:

• new contracts entered into after the change comes into effect; and
• existing contracts that are varied or renewed on or after that date.

The changes will come into force on a date set by Order in Council (with a backstop of 29 March 2028).

For completeness, contracts that are in effect before that commencement date remain subject to the unfair contract term prohibition. However, for those contracts it is the Commerce Commission (rather than the FMA) that has the power to apply to a court for a declaration that a term is unfair.

 

What are “unfair” contract terms?

A term in a standard form contract is unfair if a court is satisfied that the term:

• would cause a significant imbalance in the parties’ rights and obligations arising under the contract; and
• is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term; and
• would cause detriment (whether financial or otherwise) to a party if it were applied, enforced or relied on.

If a court has declared a contract term unfair, the financial market participant must not include that term or seek to enforce it.

Examples of unfair terms include:

• A term that penalises, or has the effect of penalising, one party (but not another party) for a breach or termination of the contract.
• A term that permits, or has the effect of permitting, one party (but not another party) to:
• avoid or limit performance of the contract;
• terminate the contract;
• vary the terms of the contract; or
• renew or not renew the contract.
• A term that permits, or has the effect of permitting, one party:
• to vary the upfront price payable under the contract without the right of another party to terminate the contract;
• unilaterally to vary the characteristics of the goods or services to be supplied under the contract;
• unilaterally to determine whether a contract has been breached or to interpret its meaning; or
• to assign the contract to the detriment of another party without that party’s consent.

A court will not be able to declare a term unfair to the extent the term:

• defines the main subject matter of the contract;
• sets the upfront price payable under the contract; or
• is required or expressly permitted by any enactment.

There are also specific exclusions for contracts of insurance where certain terms are deemed reasonably necessary to protect the legitimate interests of the insurer.

 

Our view

While FMC standard form contracts are already subject to the prohibition on unfair contract terms, this amendment expands the FMA’s remit to monitor and enforce compliance.

A key practical question for financial markets participants will be how the FMA uses this new power. The Commerce Commission has published guidance on its approach to unfair contract terms. It remains to be seen whether the FMA adopts that guidance (in whole or in part) in its own regulatory approach.

We recommend that financial markets participants review their standard form contracts for clauses that could be characterised as unfair.

Please get in touch if you would like to discuss the amendment or unfair contract terms more generally.