UK “de-banking”: Government publishes draft legislation on changes to termination rules for PSPs

What’s in the draft regulations?

Scope and application

As set out in the government’s July 2023 policy statement (which was followed by a further statement in October 2023), the new requirements in the draft Payment Services and Payment Accounts (Contract Terminations) (Amendment) Regulations 2024 will apply to all PSPs within the scope of regulation 51 of the PSRs, which contains the existing rules governing the termination of a framework contract by a PSP.

The government has concluded that it is appropriate to introduce these new requirements to all PSPs. The accompanying policy note indicates that the government may revisit whether the rules should apply differently to different business models when the PSRs are reviewed as part of developing the Smarter Regulatory Framework for financial services. For now, the government has introduced a specific exception for business models where the relationship with the end customer is intermediated (see further below).

The core reforms to the PSRs contained in the draft regulations apply to PSPs when terminating a framework contract concluded for an indefinite period which has been entered into on or after the day the regulations come into force. The existing requirements of the PSRs will continue to apply to contracts entered into before that date. While the reforms won’t strictly apply to existing contracts, the government has made clear that it expects all payment service users to be ‘treated fairly’ in a contract termination scenario.

Increased notice period

The notice period which a PSP must give to a customer when terminating a framework contract is increased from the current two months to 90 days.

Requirement to provide customer with reasoning for termination

As well as increased notice, PSPs will be required to give customers a ‘sufficiently detailed and specific’ explanation so they can understand why the contract is being terminated.

The government is not prescribing the specific information that should be provided, but the policy note states that the customer needs to be able to clearly understand from the explanation why the contract is being terminated. The information they receive must be ‘adequately specific to their circumstances’. While the use of ‘reason codes’ may be acceptable, the reason provided must be sufficiently detailed and specific. As an example, the government notes that if a contract was being terminated because the customer had breached the provider’s ‘Acceptable Use Policy’, the notice should explain which element of the policy had been breached and why.

PSPs will also be required to set out how a complaint against the termination may be made, and, where applicable, to state a customer’s right to refer any complaint to the FOS.

PSPs cannot “contract out” of termination requirements

Regulation 51(7) PSRs is amended to insert a prohibition on inserting clauses in contracts which avoid the new termination requirements by providing for discharge of the contract by agreement.

However, the existing corporate opt-out in regulation 40(7) PSRs will apply. This means that PSPs may agree with customers other than consumers, micro-enterprises and small charities that these new requirements won’t apply.

Termination of basic bank accounts

The draft regulations make corresponding changes to regulations 25 and 26 respectively of the Payment Accounts Regulations 2015 so that these new rules will also apply to the refusal of applications for and termination of basic bank accounts.

Exceptions to termination requirements

The government has provided that some or all of the requirements won’t apply in certain circumstances to ensure that PSPs can continue to meet their other requirements and duties.

Specific exceptions

The new requirements to provide increased notice or reasons for termination to affected customers won’t apply in the following circumstances:

• Where PSPs must stop transactions with the customer under regulation 31(1) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) because they are unable to apply customer due diligence measures.
• Where PSPs are required to terminate in accordance with section 40G of the Immigration Act 2014 – because for example the customer does not have leave to remain or enter the UK.
• Where PSPs reasonably believe a payment service provided under the framework contract is being used or is likely to be used in connection with a serious crime. ‘Serious crime’ is defined by reference to the broad range of offences set out in Schedule 1 of the Serious Crime Act 2007. For the purposes of the PSRs, these offences will constitute serious crime whether the crime is committed in the UK or outside of the UK.
• Where a PSP is required to terminate a contract by the FCA, the Treasury or the Secretary of State.
• Where PSPs reasonably believe their customer has committed an offence in connection with the provision of goods or services to a third party. This exception is intended to cover situations where the PSP does not have a direct relationship with a customer at the end of the chain who may have suffered harm. This might arise, for example, where the PSP’s relationship is with a merchant or other business customer who is, in turn, servicing a retail customer (and the merchant commits an offence in relation to the provision of those goods or services).

General exception

Where a PSP is subject to any other legal requirement that conflicts with the termination requirements, the other legal requirement prevails. However, to the extent possible, the PSP should comply with the termination requirements.

Where this occurs, PSPs will need to assess the extent of any conflict preventing them from giving notice to or being transparent with the customer. The policy note explains that, in practice, PSPs will need to consider whether they are still able to apply the notice and reasons requirements, in full or in part. The government provides the example of where a PSP may hold obligations to protect their staff from customer-initiated harm under the Health and Safety at Work etc. Act 1974. The PSP should consider their obligations under the Act and determine the maximum notice and transparency they can provide to the customer in question whilst complying with those obligations.

However, the general exception is without prejudice to the specific exceptions listed above. Consequently, where both the general exception and one of the specific exceptions is available, a PSP can rely on the specific exception and so will not need to give notice or reasons for the termination.

In its policy note, the government states that the reference to ‘legal requirements’ is purposefully broad because of the wide range of legal obligations PSPs face and need to balance and to ensure that the provision is future-proofed. The government has clarified that a legal requirement would, for example, extend to regulatory requirements but not to mere guidance which is not legally binding.

What else did the government consider in relation to payment service contract terminations?

According to its policy note, the government considered various other issues in relation to payment service contract termination when developing its approach. This included managing different types of credit risk, dealing with dormant bank and building society accounts, customers setting up duplicate account(s) just before or after a previous account is terminated, and situations where a PSP is under a contractual obligation to a commercial partner to terminate.

For various reasons, the government decided that these issues did not need to be addressed in the reforms. This was because the government felt that appropriate requirements were already covered in the PSRs or under other legislation or could be addressed in other ways.

Next steps

The policy note makes it clear that the draft instrument is still in development. The drafting approach, and other technical aspects of the proposal, may change before the final instrument is laid before Parliament. Nevertheless, banks and other PSPs will need to consider making changes to their terms and offboarding processes to reflect these new requirements.

HM Treasury will consider technical comments on the draft regulation. The deadline for comments is 14 April 2024 and any comments should be sent to: [email protected].

The government intends to lay the regulations before Parliament in Summer 2024, subject to Parliamentary timing, and for it to enter into effect ‘as soon as practicable thereafter’.

The government will set out its wider approach to the PSRs as part of delivering a Smarter Regulatory Framework for financial services in due course. For more on HM Treasury’s January 2023 review and call for evidence on the PSRs, which closed in April 2023, take a look at this Engage article.

If you would like to discuss the impact of the government’s proposed changes on your framework contracts or have questions in relation to any other payments related issues, please get in touch with one of the people listed above or your usual Hogan Lovells contact.

Authored by Virginia Montgomery and Stephen Timbrell.