Key takeaways

• The scope of regulation 51 (framework contract termination requirements) of the Payment Services Regulations 2017 (PSRs 2017) will remain the same with current carve-outs for regulated consumer credit agreements and the corporate opt-out still in place.
• While clear and tailored explanatory reasons should be provided to customers where contracts are terminated, except in limited scenarios, the government is not planning to prescribe the specific information that should be provided.
• 90 days’ notice of a termination should also be provided, except in limited scenarios including where the provider is obliged under legal or regulatory requirements to terminate the contract earlier.
• The FCA recommends that the government considers a UK-wide approach to de-risking – that is closing the accounts of customers who are perceived to present unacceptable risk to the firm. Its report concludes that de-risking requires a ‘system wide’ coherent strategy with clear commitments across both the public and private sector to work to address the different aspects of de-risking.

What do firms need to be thinking about?

• Although the plan is to preserve existing carve-outs under the PSRs 2017, the government’s position is that firms should default to offering 90 days’ notice and clear and tailored explanatory reasons as standard practice. While the use of ‘reason codes’ is not ruled out, the reason provided must be sufficiently specific eg citing breach of the provider’s ‘Acceptable Use Policy’ without referring to which element of the policy has been breached would not be sufficient. Firms may therefore need to revisit their systems and processes to ensure adequate tailoring of the termination notice.
• Banks, building societies and payments and e-money firms should review the FCA’s report findings and reflect on actions they should take. This should include:
• • Considering whether their management information is sufficiently detailed to meet expectations under the Consumer Duty to measure consumer outcomes and whether distinct groups of customers, such as vulnerable customers or those with protected characteristics, are receiving worse outcomes.
  • Payments firms taking another look at the FCA’s February 2023 Dear CEO letter on Consumer Duty and its subsequent letter (March 2023), setting out its expectations for the payments portfolio, to confirm they are meeting expectations.
  • Banks and building societies taking another look at the FCA’s February 2023 Dear CEO letter on Consumer Duty implementation to confirm they are meeting expectations.
• The wider question of financial inclusion is gearing up to be a major focus for the FCA in the coming months. In the press release accompanying the report, FCA Chief Executive Nikhil Rathi commented that an ‘important question for policy makers is whether all individuals, businesses and organisations should have the right to an account, as is the case in some other countries.’  The FCA’s planned regulatory action following its report includes looking into declines in basic bank accounts and it’s also aiming to focus on the unbanked in its work with the government and industry. In a recent speech on financial inclusion, Mr Rathi described not having a bank account as the ‘ultimate example of financial exclusion’. The role of technology - particularly digital identity and use of AI - in aiding financial inclusion and lessening financial crime and fraud risk will be a key part of the legislative and regulatory mix too.

What’s next?

• The government intends to deliver the secondary legislation to implement the payment service contract termination reforms ‘as a priority’. It is therefore planning to publish a draft statutory instrument by the end of 2023 and make the relevant amendments to the legislation ‘as soon as Parliamentary time allows’.
• The FCA plans a number of regulatory actions in response to its report findings. These include additional supervisory work to be sure of firms’ conclusions on accounts closed for political reasons and closer analysis of accounts closed for reasons of reputational risk, and consideration of how to improve data collection to help it monitor firm conduct in relation to account access. The FCA expects to have a better view on any necessary steps in relation to this latter point following the conclusion of the PEP review and it will report on its findings on data more broadly by mid-2024. The FCA also plans to hold a financial inclusion sprint in Q1 2024 focussed on improving consumer access to financial services.
• See ‘FCA’s planned regulatory action’ and the following sub-sections in the below article for more on the further work planned by the FCA and its other suggested considerations for the government.

Read on for a more detailed look at the HMT policy statement and FCA report.

HM Treasury policy statement on payment service contract termination rule changes

In July 2023, HMT published a policy statement on payment service contract termination rules and freedom of expression which set out the government’s plans to enhance requirements relating to the process and conduct requirements placed on payment services providers (PSPs) in cases of framework contract termination. These include extending the notice period for termination of a framework contract from two months to 90 days and mandating that PSPs give a clear and tailored reason for termination (both subject to limited exceptions).

The government subsequently engaged with industry, law enforcement authorities and the FCA to develop further detail to support implementation of the reforms in advance of legislation. This involved identifying the circumstances under which banks and other PSPs may decide to terminate a payment service framework contract and considering a limited set of scenarios where there may be reasons for varying the application of the new requirements.

This latest statement is aimed at providing additional clarity on the implementation of the reforms announced in July, including intended scope, the government’s expectations for how the reforms should apply to payment service framework contracts in practice, and when the government intends to introduce the necessary legislation.

Intended scope

• The firms and services currently in-scope of the existing requirement under regulation 51 (framework contract termination requirements) of the PSRs 2017 should remain the same following amendment of this provision for the contract termination reforms.
• Pre-existing carve outs – specifically, for regulated consumer credit agreements and the corporate opt-out - should also continue to apply. However, the government’s position is that firms should default to offering 90 days’ notice and clear and tailored explanatory reasons as standard practice.

Government’s expectations for application of the reforms

• Clear and tailored explanatory reasons should be provided in cases where a PSP decides to terminate a contract for the provision of a payment service, except in limited scenarios. The government is not planning to prescribe the specific information that should be provided to the customer. It is the outcome of the communication that is key, ie the customer should clearly understand why the contract is being terminated and be provided with supporting information which is ‘adequately specific’ to their circumstances. This does not rule out the use of ‘reason codes’ by PSPs, on condition that the reason provided is sufficiently specific.
• 90 days’ notice of a termination should also be provided, except in limited scenarios including where the provider is obliged under legal or regulatory requirements to terminate the contract earlier, or where there is a documented and reasonable risk of serious or significant harm to the customer, to staff, or a connected third-party to the framework contract (see further ‘Interactions with wider legal and regulatory obligations’ below).
• Subject to the corporate opt-out, the terms of the framework contract may not in of themselves be used to circumvent these requirements. However, in application of the general principles of contract law a party will still have the right to treat the contract as unenforceable, void or discharged (eg, where there has been a serious and uncorrected breach of contract).

Interactions with wider legal and regulatory obligations

• PSPs will have limited flexibility not to provide 90 days’ notice of account closure and/or a clear and tailored reason where this would conflict with other legal requirements or regulatory obligations. The policy statement lists some of the existing guidance in this area, including the Joint Money Laundering Steering Group’s (JMLSG) guidance on the termination of accounts in situations where there are financial crime concerns (see paragraphs 6.60-6.89 of the JMLSG guidance).
• There may also be scenarios where PSPs have a duty to protect their staff and customers from harm, eg under the Health and Safety at Work etc. Act 1974 or the FCA’s Consumer Duty. Here, firms are likely to need to take a case-by-case approach bearing in mind that alerting a customer to their behaviour may result in new risks of harm to their staff or others. PSPs may be permitted to provide less notice or limited transparency for termination, and HM Treasury notes that changes to regulations will ensure scope for this.
• HMT emphasises that immediate account termination should only be used for the most serious cases, ie where the provider reasonably believes the customer’s conduct amounts to an offence (such as a public order offence). This will usually involve a call or report being made to the police.

FCA report on UK payment accounts access and closures

On 9 August 2023 the FCA sent an information request and accompanying letter on account closures to the largest banks and building societies, with a deadline of 25 August 2023.

The FCA has now analysed the results from the responses of the 34 firms that participated and published a report setting out what the data has told it so far and what follow up action it plans to take.

While the data was supplied within a short timescale and there are some limitations (eg some firms were only able to provide data at an account level rather than for individual customers), work undertaken so far has allowed the FCA to come to some initial conclusions which have informed its planned next steps.

Initial conclusions

• Political views: Information the FCA has received so far does not suggest that accounts have been closed because of the political beliefs or views lawfully expressed by account holders. However, it will be doing further analysis and supervisory work to be sure of this. It will also look at accounts closed because of reputational risk, where the information provided by firms has so far been inconsistent. The FCA notes that the significant majority of the cases cited with this reason for closure are from payments firms (ie payment or e-money institutions).
• Reasons for declining, suspending or terminating an account: The most common reasons providers gave for declining, suspending or terminating an account were because it was inactive/dormant or because there were financial crime concerns. The FCA has not been able to draw detailed conclusions on the types of customers affected due to the limitations of the data received.
• Approach to de-risking: The FCA recognises that, learning from other jurisdictions (see below ‘UK is not alone with de-risking issues’), there may be a need for a government-led greater strategic and cross-system response to addressing de-risking in the UK, and potential for legislative change to enhance provisions on rights to access banking services for both individuals and businesses, eg widening access to bank accounts. The FCA concludes that its report shows de-risking requires a ‘system wide’ coherent strategy with clear commitments across both the public and private sector to work to address the different aspects of de-risking.

UK is not alone with de-risking issues

The FCA makes the point that the UK is one of several countries where there are concerns about the scale of account closures and access to financial services. It has also published a research note on international perspectives on de-risking in the financial system, looking at how other jurisdictions have approached the issue. It has drawn on the findings in this research note when setting out next steps. See in particular the points under ‘Suggested areas for further consideration by the government’ below.

Actions for firms

The FCA expects credit institutions (ie banks and building societies) and payments firms to draw on the report’s findings and reflect on actions they should take, specifically:

• To consider whether their management information is sufficiently detailed to meet expectations under the Consumer Duty to measure consumer outcomes and whether distinct groups of customers, such as vulnerable customers or those with protected characteristics, are receiving worse outcomes.
• Payments firms should take another look at the FCA’s February 2023 Dear CEO letter on implementation of the Consumer Duty in payments firms to confirm they are meeting expectations. Among other things, the letter highlighted the importance of strengthening customer onboarding controls which can reduce the frequency of account suspensions and the impact on customers. The FCA’s subsequent letter (March 2023), setting out its expectations for the payments portfolio, also highlighted issues that it has observed with some payments firms’ broader financial crime frameworks and the action it expects firms to take to address them.
• Credit institutions should take another look at the FCA’s February 2023 Dear CEO letter on implementation of the Consumer Duty in retail banks and buildings societies to confirm they are meeting expectations. The letter highlighted that firms are required to act to deliver good outcomes for retail customers. Credit institutions which are not retail banks or building societies should take another look at the equivalent letters sent to them (eg private banks received a letter in January 2023 and wholesale banks received a letter in September 2023).

FCA’s planned regulatory action

The FCA emphasises that it will take prompt regulatory action if it identifies significant deficiencies in the arrangements of any firm assessed, including under the Consumer Duty.

The FCA’s further work will include the following priority actions:

• Data accuracy: Further follow up to provide assurance of the accuracy of the data reported to it, concentrating particularly on outlier firms.
• Political beliefs or opinions: Additional supervisory work to be sure of firms’ conclusions on accounts closed for political reasons and closer analysis of accounts closed for reasons of reputational risk.
• Declines in basic bank accounts: Further review of declined applications for and terminations of basic bank accounts.
• Ongoing supervisory monitoring of firms: Consideration of how to improve data collection to help it monitor firm conduct in relation to account access. The FCA expects to have a better view on any necessary steps following the conclusion of the PEP review and it will report on its findings on data more broadly by mid-2024.

Other work will include expansion and refinement of the questions in its next Financial Lives Survey (FLS) (due in 2024) about those consumers without payment accounts and the commissioning of further work to understand some of the underlying and interrelated issues about unbanked consumers identified in its FLS data.

FCA work with the government and industry

The FCA plans to support and work with the government and industry to address the causes and impacts of account declines, suspensions and terminations, in particular by:

• Strengthening payment account termination protections: Supporting the government and the industry as they implement the increased minimum notice period before accounts are terminated and to increase the transparency provided to consumers on why their account has been terminated (see above on the latest HMT policy statement on this).
• Mitigating the drivers for account declines, suspensions and terminations: Working with trade bodies and their members to further understand the reasons behind their decisions for account declines, suspensions and terminations and their relative prevalence. The FCA notes that this may lead to further guidance and opportunities to set firmer expectations on how banks can effectively manage the risks in particular groups of customers most impacted by de-risking.
• Addressing financial crime drivers: Continuing its work with the government and other partners to deliver measures set out in the Economic Crime Plan 2023-2026 and the National Fraud Strategy which aim to reduce economic crime through ongoing delivery of day-to-day detection, prevention and pursuit of economic crime.
• The use of AI: Continuing its work to understand how firms use artificial intelligence (AI) to inform their decision making on payment account provision within its broader approach to AI, including working with regulatory partners to support safe and responsible adoption alongside innovation to support growth and international competitiveness.
• Innovation: Holding a financial inclusion sprint in Q1 2024 focussed on improving consumer access to financial services.
• Focus on the unbanked: The FCA’s work also highlights the 2.1% of adults who are unbanked. While over half of those who don’t have a current account say that they do not want one, the unbanked include many young people and those who have challenges with numeracy. The Prime Minister has set out a national plan to support numeracy, particularly in schools, and the FCA suggests that money management and learning about bank accounts could be considered as part of this work.

Suggested areas for further consideration by the government

In light of the findings of its report and observations drawn from the research note on international perspectives on de-risking, the FCA also sets out a number of areas that the government may wish to consider, which are also reflected in an accompanying letter to HMT:

• consideration of a system wide de-risking strategy as published recently by the U.S. Treasury in relation to the U.S. financial system;
• greater checks by Companies House to support the fight against fraud;
• the development of a strategic approach to digital identity to aid financial inclusion and lessen financial crime risk;
• consideration, as part of the passage of the Online Safety Bill, of whether the cost of compensating for consumer losses due to fraud is being appropriately shared;
• whether to mandate through legislation the creation of a ‘universal service obligation’ (USO) on account providers, for retail or business customers, as in some other countries’ banking systems (eg France, Belgium) or some UK utilities (eg broadband, energy).

Next steps

The government intends to deliver the secondary legislation to implement the payment service contract termination reforms ‘as a priority’. It is therefore planning to publish a draft statutory instrument by the end of 2023 and make the relevant amendments to the legislation ‘as soon as Parliamentary time allows’.

See above ‘FCA’s planned regulatory action’ and the following sub-sections for the further work planned by the FCA and its other suggested considerations for the government.

If you would like to discuss these developments with us, please get in touch with any of the people named above or your usual Hogan Lovells contact.

Authored by Julie Patient and Virginia Montgomery.