Nine common problems with the terms of payment institutions and electronic money institutions.
Your terms and conditions form the foundation of the relationship between you (the payment institution or electronic money institution) and your clients. Getting terms wrong can:
- make you look unprofessional;
- breach your regulatory obligations; and
- leave you more susceptible to claims from your clients.
The team at Creed Solicitors has reviewed / drafted / updated nearly 100 sets of terms for payment institutions and electronic money institutions, so we have seen it all.
We thought it would be useful to share our experience of the most common problems with the terms of payment institutions and electronic money institutions, so you can avoid the same mistakes when drafting your terms or so that you can arrange for your terms to be updated, if required.
Problem 1 – the terms don’t make sense.
Quite often, sets of terms that we have been asked to review for clients are very long and convoluted and (being blunt) don’t make a lot of sense. This might be because the person who was asked to draft them:
- was good at drafting terms, but wasn’t experienced in drafting terms for payment institutions and electronic money institutions;
- was experienced in the payments and electronic money industry, but was not experienced in drafting terms; or
- was neither experienced in drafting terms nor in the payments or electronic money industry.
Terms which are long, convoluted and don’t make much sense are dangerous for any business (including payment institutions and electronic money institutions) as when they need to be relied upon, they won’t help and may indeed make problems worse!
If you do get into a dispute with a client and the terms are long, convoluted and don’t make much sense, most likely the dispute will rumble on much longer than it needs to (meaning paying lawyers much more money to sort it out) and you may have to pay out much more in compensation to your customer.
Problem 2 – not having separate sets of terms for consumers and businesses.
Often, payment institutions and electronic money institutions will have one set of terms for both consumer clients and business clients. However, we recommend having separate sets of terms for consumers and businesses.
Principle 6 of the FCA’s principles for business requires that firms (including payment institutions and electronic money institutions) “pay due regard to the interests of its customers and treat them fairly”.
In our view, you breach principle 6 if a consumer has to read numerous provisions which only relate to businesses. As well as complying with the FCA’s expectations, your consumer, and business clients will appreciate you going to the effort as the terms will be geared towards them and much shorter!
An experienced payments’ solicitor can help you to draft separate sets of terms for consumers and businesses so that you don’t land yourself in hot water with the FCA.
Problem 3 – not accurately describing how your business model operates
It is extraordinary how often terms don’t accurately reflect the business model of the payment institution or electronic money institution they are meant to govern the relationship of.
Terms accurately reflecting a payment institution or electronic money institutions’ business model is obviously essential, as your terms should set out what you are promising to do for the customer.
If they don’t, then you are less well protected when something goes wrong. The person drafting needs to understand your model, so make sure you choose the right advisor.
Problem 4 – not clearly stating how you safeguard client funds.
One of the FCA’s top priorities, when it comes to payment institutions and electronic money institutions, is safeguarding. As well as looking at how payment institutions and electronic money institutions safeguard, the FCA is taking a close look at how payment institutions and electronic money institutions communicate how they safeguard in their terms.
The FCA will take a very dim view if your terms:
- Overstate the protection that a client is given;
- Incorrectly state when money is safeguarded and when money is not safeguarded;
- Do not state adequately when funds are safeguarded.
We are aware of the FCA looking closely at safeguarding wording in terms when firms are going through the authorisation process.
Problem 5 – not using plain English.
It is always a good idea to make sure the target audience of any set of terms can understand what the terms mean.
It would be a good idea, particularly for consumer terms, to arrange for persons who are not involved in the payments’ industry, to read your terms, and provide you with feedback on what parts they understand, and what parts they don’t understand.
Particularly the parts that place an obligation or burden on the consumer.
You might choose to take a more professional tone with business customers. However, business customers still need to be able to understand what they are reading.
Terms which are easy to understand will put you on a stronger footing with your clients if something goes wrong. As, in the event that your terms protect you from a claim, if the wording is easy to understand the client will be more likely to accept that they do not have a valid claim and move on. If your terms are ambiguous or difficult to understand, this gives the customer more room to manoeuvre.
Problem 6 – terms too hard to navigate.
Your terms have to include everything set out in Schedule 4 of the Payment Services Regulations 2017. They therefore have to be longer than you might want them to be. However, they can be made much easier to navigate if the webpage that they are displayed on is interactive, i.e. it allows persons to skip from one section to the next easily.
An experienced payments solicitors will be able to draft terms under useful headings so that your IT team can easily make the terms interactive.
Problem 7 – repeating the same terms over and over again!
Many sets of terms and conditions, we have read, repeat the same point numerous times in the same document. This makes the terms longer than they need to be, confusing and possibly contradictory as they make the same point but in slightly different ways.
Your clients may deem this to be unprofessional. Whoever drafts your terms, needs to make sure that your terms are clear and that the same points are not made more than once.
Problem 8 – lacking the required information.
Your terms need to include (amongst other things) all the information set out in Schedule 4 of the Payment Services Regulations 2017. Quite regularly, terms that we have been asked to review don’t do this, which is in breach of the Payment Services Regulations 2017.
A trusted legal advisor can ensure that nothing which has to be in your terms is omitted, and your PSP is not exposed to unnecessary risk.
For example, a payment service user usually only has 13 months to seek redress for an unauthorised or incorrectly executed payment from a payment service provider. This 13-month time limit can be reduced to a much shorter period of time (generally), if the payment service user is a large business.
However, Regulation 74(2) of the Payment Services Regulations 2017 makes clear that a time limit for a payment service user to seek redress will not apply if the payment service provider has failed to make available the information set out in Part 6 of the Payment Services Regulations 2017.
Accordingly, by not including all the required information, your business is open to more risk.
Problem 9 – not involving stakeholders in the drafting process
Your terms frame the relationship between you and your customers. We often find that terms are seen as something the compliance team should deal with, and not something that investors or directors should get too involved with.
However, your stakeholders should be involved in the drafting process as they may have valuable input, that those which were tasked with drafting the terms, or instructing a solicitor to draft the terms, don’t have. It will also allow the stakeholders to find out what the terms say and give them the opportunity to ask the person who drafted the terms what the risks to their business are.
The person drafting the terms needs to take input from all stakeholders and should be able to explain to stakeholders what the potential risks are to their business.
Conclusion
For busy compliance teams with long to-do lists, it is sometimes easy to overlook the terms of the payment institutions or electronic money institutions that they work for.
However, if compliance teams put effort into making sure their terms avoid these common problems, they will be grateful when a customer complains and their payment institution or electronic money institution is well protected or when the FCA come to review the terms and don’t have any issues with them.
Engaging an experienced legal advisor to craft a bespoke set of airtight terms which avoids all nine of these common problems will give you the peace of mind that your business is well protected.
Creed Solicitors has significant experience in drafting terms for payment institutions and electronic money institutions and can create bespoke terms for you or audit your current terms and identify any shortcomings.