De-banking: what next for payment service providers?

The de-banking of customers, and the legal and regulatory implications that can arise, are not new issues. However, those issues have come into sharp focus following recent publicity surrounding a high-profile account closure. This article considers what payment services firms can expect next following the increased scrutiny from customers, media, government and the regulators.

 

What can/ should customers to be told?

It has always been the case that payment services providers (PSPs) must be on heightened alert when providing financial facilities to a politically exposed person, due to the higher risk of money laundering and bribery challenges. When presented with financial crime concerns, PSPs face a balancing exercise of meeting regulatory obligations by stopping wrongful use of payment services, whilst not inadvertently tipping off a customer – which can be a fine line to tread.

 

Impact of the Consumer Duty

In July 2023, HM Treasury announced legislative plans to extend the mandatory notice period for account closures to 90 days, with clear tailored explanations to be provided. The proposals replicate aspects of the Consumer Duty which requires communications to consumers to be easily understood. The customer must clearly understand why the contract for their account is being terminated and be given information specific to their circumstances. The intention is to give customers more time to challenge a decision and/or find a replacement provider. There are exceptions if the explanation would be unlawful or inconsistent with the PSPs’ wider legal and regulatory requirements.

Pursuant to the Payment Accounts Regulations 2015, Equality Act 2010 and the Consumer Duty (as applicable) a decision to terminate an account solely on grounds that relate to a customer’s protected characteristics has always been prohibited. If a PSP relies upon a contractual power to terminate, it must act within the parameters of that power. Whatever the ultimate statutory reforms, a balance must be achieved between the right of access to banking facilities and PSPs being able to deal with the risk of financial crime and the freedom to make commercial and reputational decisions about its customers, in accordance with its terms and conditions. 

 

Managing DSARs and queries from FOS

The increased media interest in de-banking will have motivated previously terminated customers to bring challenges, either relating to the decision to close an account, or regarding the handling of a customer’s complaint. The customer will need information about the termination and the number of Data Subject Access Requests (DSARs) to obtain this information will have increased.

DSARs have long been the weapon of choice by claims management companies, as the responses can produce documents which are useful for bringing a claim. PSPs need to be prepared to respond, with trained teams to minimise the risk of inadvertent “over disclosure”. The Information Commissioner’s Office guidance is clear that only personal data relevant to the individual making the request need be disclosed, such that only excerpts from documents should be disclosed. PSPs can request more time to respond, particularly if large scale requests are made.

A customer, former customer, or claims management company can make a complaint to the Financial Services Ombudsman (FOS) about a de-banking decision with the aim of receiving compensation. FOS has a specialist team that can consider account closures and sensitive issues such as financial crime concerns and has the power to make further document requests. Due to typical FOS complaint resolution timescales, it is unlikely that FOS can prevent an account from being closed, but it does have the jurisdiction to suggest that an account be re-opened. Nonetheless, it seems more likely that compensation and/or an apology is going to be the preferred outcome for a disgruntled customer.

 

Threat of litigation

Some customers will want their complaint aired publicly in court, most likely on the grounds of non-compliance with account contractual terms, or contraventions of the Equality Act. Indeed, there have been prior attempts by off-boarded customers to bring a mass claim and/ or threats of group litigation.

How likely is litigation? The Financial Conduct Authority (FCA) produced a review, which indicates that de-banking issues are in fact fairly isolated. In addition, it can be difficult to establish that the customer (or former customer) has suffered an actionable harm, especially if the customer has sourced an alternative account provider. The FCA focus upon providing de-banking explanations specific to the individual, may render claims unsuitable for a mass consumer action if there is insufficient commonality of facts. Indeed, the litigation trend of denying claimants mandatory injunctive relief favours PSPs, who can avail of defences of reasonableness, proportionality, with reliance on their policies and terms and conditions.

FOS seems the likely forum for increased dissatisfied customer activity; it is the low-cost option, has the lower “test” of what is “fair and reasonable”, and now has the extended financial award ceiling of GBP415,000 for an upheld complaint.

 

Conclusion

The publication of reports into the de-banking issue continues and the proposed secondary legislation is still awaited. Publicity surrounding account closures is expected to remain energised for some time yet. Accordingly, PSPs should ensure robust mechanisms for responding to DSARs, potential court action and higher volumes of FOS complaint activity.

 

This article first appeared in the February 2024 issue of Butterworths Journal of International Banking and Financial Law.