Mental Capacity – a person’s ability to make a decision

legal updates

This is not a “one size fits all”, and you will need practices and procedures in place for such an eventuality.

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Every so often, we have a case regarding a request for the unwinding of a purchase because the customer did not have the mental capacity to enter into the contract in the first place.

We have had various reasons given for the unwinding of a deal, from a diagnosis of dementia to the fact they were referred to an NHS mental health unit.

However, neither of these reasons means that somebody automatically does not have the mental capacity to enter into a contract with you.

The Financial Conduct Authority (FCA) regulates any contract involving finance, and in their guidance, they advise that the Mental Capacity Act 2005 (MCA) sets out the legal framework concerning mental capacity for England and Wales. The Adults with Incapacity (Scotland) Act 2000 is the framework for Scotland.

The FCA frames mental capacity as:

  • CONC 2.10.3 Mental capacity is a person’s ability to make a decision. Whether or not a customer has the ability to understand, remember, and weigh up relevant information will determine whether the customer is able to make a responsible borrowing decision based on that information.
  • CONC 2.10.4 A firm should assume a customer has mental capacity at the time the decision has to be made, unless the firm knows, or is told by a person it reasonably believes should know, or reasonably suspects, that the customer lacks capacity.
  • CONC 2.10.5 Where a firm reasonably suspects a customer has, or may have, some form of mental capacity limitation which would constrain the customer’s ability to make a decision to borrow, the firm should not regard the customer as lacking capacity to make the decision unless the firm has taken reasonable steps without success to assist the customer to make a decision.
  • CONC 2.10.6 Amongst the most common potential causes of mental capacity limitations are the following examples, a mental health condition, dementia, a learning disability, a developmental disorder, a neurological disability or brain injury and alcohol or drug (including prescribed drugs) induced intoxication.
  • CONC 2.10.7 Where a firm understands or reasonably suspects a customer has a condition of a type in CONC 2.10.6, this does not necessarily mean that the customer does not have the mental capacity to make an informed borrowing decision.

Every case is different and there are all sorts of reasons why somebody may lack capacity. But, there are also situations where you may be told to unwind a deal due to a customer’s lack of capacity and this simply isn’t correct. Somebody who has been referred to a mental health department for treatment may well still have capacity. Similarly, somebody with dementia may have capacity on the day after their diagnosis, but 12 months later, they do not. Having a condition is not an automatic red flag on mental capacity.

I have come across clients that due to the nature of their condition have capacity early in the day, but become less lucid as the day progresses. Therefore, any appointments and/or meetings involving decision-making needed to be scheduled for early morning.

Often, capacity can only be determined by a treating medical professional. In some instances, it may be prudent to request the customer’s GP or medical practitioner to advise on their capacity.

This is not a “one size fits all”, and you will need practices and procedures in place for such an eventuality. You must fully document your decision process should such circumstances arise and this is dealt with at:

If you have questions about contracts involving mental capacity, we are always here to help.


Need help with keeping on track with FCA Regulation and Compliance? Partner with Automotive Compliance

Darren FletcherLegal AdvisorRead More by this author

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