The policy reads, “In the Code of Conduct section, we’ve clarified that use of offensive language and fraudulent activity is prohibited. We’ve also clarified that violation of the Code of Conduct through Xbox Services may result in suspensions or bans from participation in Xbox Services, including forfeiture of content licenses, Xbox Gold Membership time, and Microsoft account balances associated with the account.”
That being said we’re sure some are wondering how will Microsoft know if offensive language is used? Thankfully this doesn’t mean that Microsoft will be actively monitoring your conversations, but rather it seems that the onus falls onto users to report other users who might have violated the policy.
It does seem a bit strict, but we guess Microsoft is just trying to cover their bases. Presumably amongst friends you’ll be free to cuss and swear like a pirate all you like, but if you’re playing games over Xbox Live or chatting via Skype amongst people you’re not familiar with, it’s probably best to keep things PG.