UK Government publishes policy note imposing new requirements on UK payment service providers in relation to termination of payment service contracts with customers
Introduction
On 14 March 2024, the UK Government published a policy note announcing changes to the requirements applicable to payment service providers (PSPs) when they intend to terminate a contract for payment services. These changes, aimed to ensure greater protection for consumers and other users of payment services, are being introduced in the aftermath of some recent high-profile incidents of ‘de-banking’ where terminations of bank accounts or payment services were motivated by a customer’s personal or political beliefs.
Through the announced amends, the UK Government has reaffirmed its policy position that customers’ payment services should not be terminated on grounds relating to their lawful freedom of expression. While this prohibition already existed, the reforms seek to reinforce this position.
The reforms are published in the UK Government’s draft statutory instrument on ‘The Payment Services and Payment Accounts (Contract Terminations) Regulations 2024’, and the rationale underpinning the legislation is explained in the short policy note published by HMT.
What are the key reforms?
The new requirements would apply in relation to provider-initiated terminations of framework contracts concluded for an indefinite period and entered into on or after the day the SI would come into force.
The table below summarises the key reforms.
| Requirement | Intended purpose / further comments | |
| Notice period | The notice period for provider-initiated terminations of framework contracts concluded for an indefinite period is increased from the current two months to 90 days. | More time for users of payment services in receipt of a termination notice to communicate with or make a complaint to their provider, the Financial Ombudsman Service (FOS) or seek an alternative service to mitigate the effect of the termination. |
| Detailed and specific explanations | PSPs will be required to give affected users a sufficiently detailed and specific explanation so the customer can understand why their contract is being terminated. PSPs will be required to set out how a complaint against the termination may be made, and state a user’s right to refer any complaint to the FOS. |
This forms part of the UK Government’s broader public policy, and is aimed at achieving a higher standard of transparency. The UK Government is not expected to prescribe in the legislation the specific type of information that should be provided to a customer. What would be important is that the customer clearly understands why the contract was terminated. The information received should be adequately specific to their circumstances. |
| Prohibition against discharging contracts by agreement | Clarification is provided that it is prohibited to insert clauses in contracts which avoid the new termination requirements by providing for discharge of the contract by agreement. | Although this appears to be, at least at this stage, a blanket requirement which does not consider different business models, the policy note does state that the corporate opt-out will apply to the new requirements (i.e., where the customer is not an individual consumer, micro-enterprise or a charity, the parties may agree that the new requirements do not apply). |
| Exceptions to the requirements | PSPs’ specific circumstances may enable them to disapply some or all of the requirements to ensure that PSPs can continue to meet certain conflicting legal requirements and duties. These have been discussed in greater detail in the following section C of our analysis. | Where the requirements conflict with other legal requirements (such as in relation to money laundering and generally to ensure safety from harm for customers or staff), the other legal requirements will generally take precedence. |
| Corresponding changes in Payment Accounts Regulations 2015 | Corresponding changes are made to rules concerning the refusal of applications for and termination of basic bank accounts in regulations 25 and 26 respectively of the Payment Accounts Regulations 2015. | To ensure that users of this type of payment service (widely treated as a utility) benefit from an equivalent level of protection as appropriate. |
What are the exceptions?
Where the requirements conflict with other legal requirements (such as in relation to money laundering and generally to ensure safety from harm for customers or staff), the other legal requirements will generally take precedence.
Examples of these exceptions include where providers are required to terminate in accordance with:
a) Money laundering and terrorist financing laws (i.e. because they are unable to apply customer due diligence measures);
b) Immigration laws;
c) Serious crime legislation; and
d) Other requirements imposed by the FCA, the Treasury or the Secretary of State; or
e) Where PSPs reasonably believe that their customer has committed an offence in connection with the provision of goods or services to a third party.
Where a PSP is subject to any other legal obligation that is not included in the above list and that still conflicts with the newly introduced requirements, the other legal obligation prevails but, to the extent possible, the PSP should also comply with the termination requirements.
The UK Government acknowledges the rules may not always apply appropriately to different products or services offered to different types of clients (e.g. merchant customers are different to retail customers). For now, the UK Government believes its current targeted and limited exceptions set out in points a) to e) above are sufficient. However, the UK Government has also stated that there may be future opportunities to calibrate rules across different business models, as part of the Smarter Regulatory Framework for financial services.
Other relevant considerations
In developing its policy note, the UK Government also considered certain discrete matters which are not directly addressed in the new provisions, including issues that have been addressed elsewhere in the regulations. By way of illustration, these include:
- Managing different types of credit risk: Existing provisions which allow the instant freezing of payment instruments in relation to credit liability (regulation 71(2)(c) of the 2017 Regulations) have been deemed to be sufficient – HTM has generally taken the view that a temporary cessation while the customer seeks to resolve their financial constraints is considered more proportionate than the removal of the underlying financial service entirely.
- Customer-initiated terminations: Customer-initiated terminations (see regulation 51(1)) are already permitted.
- Fraud: Where customers are specifically found to have provided false information in applying for duplicate accounts (such as under a different legal name or address), this may be grounds for termination outside the notice and communication requirements where this amounts to fraud.
- Contractual obligation by commercial partner to terminate: Where a PSP is contractually obliged by a commercial partner to terminate without knowing the specific reason behind the requested termination, the PSP should conduct their own due diligence to determine of whether the termination would indeed be necessary and would also need to provide the required degree of notice and transparency in doing so.
Next steps
The UK Government has invited technical comments on the draft via email by 14 April 2024.
Subject to Parliamentary timing, the UK Government intends to lay this legislation before Parliament in Summer 2024, and for it to commence as soon as practicable thereafter.
If you would like to receive our regular payments alerts in your inbox, click here.
If you would like to read Bird & Bird’s previous alerts, please check out our payments in focus webpage here.
