Which firms are affected?
It is very important to recognise that while these changes will affect banks providing current accounts – the area that in practice has received the greatest focus in the media – they will affect all Payment Service Providers (PSPs) that provide payment services through a framework contract within the scope of regulation 51 of the Payment Services Regulations 2017 (PSRs). The new law will therefore apply far more widely than to banks providing current accounts. It will also cover (for example) e-money accounts and merchant acquiring services.
The new termination requirements will not however apply to payment service contracts that are also consumer credit agreements. PSPs will also be able to agree not to apply the new termination requirements to their contracts with corporate customers.
When will the new rules apply?
Provided Parliament approves the draft new law, agreements concluded on or after 28th April 2026 will be subject to the new requirements. Agreements concluded before that date will remain subject to the existing requirements to give at least two months' notice of termination.
Greater protection for users of payment services
The most important changes are that PSPs will in the future be required to:
- provide a 'notice of termination' setting out their intention to end the agreement for the relevant payment service (where the 'framework contract was concluded for an indefinite period') 90 days before the termination takes effect (instead of 2 months as now);
- include in the 'notice of termination' an explanation which is sufficiently detailed and specific to enable the customer to understand why the account is being closed; and
- notify the customer of any right they might have to complain to the Financial Ombudsman Service (FOS),
unless:
- one of a specific set of exceptions applies (see below); or
- providing the explanation or giving the 90 days' notice would conflict with another legal requirement. In that case, that other legal requirement will prevail 'to the extent of the conflict'. We call this the 'legal conflict exception'.
In summary, the effect of the 'legal conflict exception' is that:
- in some cases, despite the new draft law, the PSP won't have to give the customer any notice or explanation of the termination;
- in other cases, it will still have to give the customer some notice of the termination (albeit less than 90 days) with or without an explanation.
What the firm has to do will depend on what the other conflicting legal obligation is.
Specific exceptions
In addition to the general 'legal conflict exception', the draft legislation provides for a further set of exceptions where PSPs will be able to close accounts without giving the 'notice of termination' (and so, as we read the draft legislation, without giving either the 90 days' notice or the sufficiently detailed explanation).
In summary, these are where:
- the PSP is unable to apply customer due diligence measures required by anti-money laundering legislation (for example it has requested information to verify a customer's identity but the customer has not provided it);
- the account is required to be closed in accordance with the Immigration Act 2014 (this provides for the freezing and closure of certain accounts held by persons who are in the UK but do not hold appropriate immigration status);
- there are reasonable grounds to suspect that the relevant account has been used, is being used, or will be used in connection with a serious crime. 'Serious crime' uses an existing legal definition in the Serious Crime Act 2007 that covers, among other offences, money laundering, fraud, bribery, drug and people trafficking (and equivalents across the UK); and
- where the PSP believes the customer (payment service user, PSU) is using the payment service in the course of providing goods / services in a way that that is or is likely to involve the commission of an offence.
The draft legislation also provides that in certain specific circumstances:
- where the PSU's (customer's) conduct towards a person acting for or on behalf of the PSP (for example the employee of a bank) amounts to certain types of offence (particularly under the Public Order Act 1986 and Prevention from Harassment Act 1997, as well as equivalents in Scotland and Northern Ireland); or
- the PSU provided incorrect information when entering into the agreement and had they provided the correct information the PSP would not have entered into the agreement,
the PSP will still have to send the customer the 'notice of termination' containing a detailed explanation, however instead of giving 90 days' notice, this has to be provided 'without delay' following the firm's decision to terminate the agreement. In practical terms, this would shorten the required notice period.
Care is needed when seeking to rely on the exceptions
Once the new requirements have come into force, a PSP that does not provide a customer with the required notice and explanation will be at risk of a range of potential consequences, including customer complaints to the FOS, customer litigation, regulatory enforcement action, and significant reputational damage. As a result, firms will need to take care when placing reliance on any of the exceptions.
Agreement terminations for suspected financial crime reasons are already a particularly sensitive and challenging area (for both firms and their customers) and in our view this is likely to remain the case even if Parliament approves the new legislation. While the specific new 'reasonable grounds to suspect use in connection with serious crime' exception is to be welcomed, not every crime will count as a 'serious' one on the relevant definition. It is also likely that a firm will need some evidence of criminal behaviour to show the 'reasonable grounds to suspect'.
One of the areas that firms will need to look at particularly carefully will be how to deal with circumstances in which providing any explanation or notice to a customer might amount to the offence of 'prejudicing an investigation' in reg 87 MLRs 2017 (or other similar offences). The 'legal conflict exception' may assist in such cases, but this will need careful analysis and operational implementation.