Steiner Case No Save Haven For Card Issuers, Acquirers, Processors or Merchants

I have a real problem with the facts and ultimate outcome for the cardholder in the recent case of Steiner v National Westminster Bank plc [2022] EWHC 2519 (KB) decided in October. I make no criticism of the lawyers or judge involved, but those in the payment card business should not see it as setting up any kind of safe haven. 

In essence, the court absolved a credit card issuer from liability for the price of a timeshare deal under section 75 of the Consumer Credit Act because the supplier of the timeshare ('CLC') was found not to be a party to the credit card 'arrangements'. Instead, those arrangements were found only to involve a separate company ('FNTC') that was not part of the same corporate group as CLC and was acting as a trustee and not as agent for CLC. 

Unfortunately, it seems the Mastercard rules were not fully explored, as the judge held:

13. Equally, there was no evidence before me as to the rules of the Mastercard network, but it was not suggested that they prohibited a merchant who was a member of the scheme from receiving payment under the scheme as trustee or agent for another.

However, the Mastercard rules effectively require that acquirers, merchants and sub-merchants (and the intermediate 'Payment Facilitator') must be party to the overall scheme arrangements, and it would be a breach of those rules if that were not the case (see Chapters 5 and 7). 

In addition, it appears that as a separate company and a trustee, FNTC was not lawfully able to handle funds due to CLC under the Payment Services Regulations 2017. There is no evidence that FNTC was a payment institution (or small payment institution) or the agent of one; and as a separate company and trustee it could not benefit from any of the exclusions from the need for authorisation/registration as a payment institution, the most common in such scenarios being the exclusion for a commercial agent or a group company collecting or making payments on behalf of other companies in the same group. 

In this specific case, there may have been good reasons why the Mastercard rules were not explored and/or the card acquirer, FNTC and CLC were not joined as defendants and subject to a barrage of claims and remedies to recover the funds (assuming that the card issuer could not have known of the apparent breach of scheme rules and FNTC's apparently unlawful conduct). There may have been shortcomings in the evidence or other issues involved in mounting the potential legal claims and remedies - not the least of which would be the necessary financial resources.

But I do not see this case as a reliable basis for anyone to start setting up trustees as payment processors in an attempt to avoid liability under supply contracts, card scheme rules, Payment Services Regulations and/or section 75 of the Consumer Credit Act!

Card Acquiring Remedies for SMEs

After finding that the UK card acquiring market was not working for businesses with a turnover of £50 million, you might have expected that the Payment Systems Regulatory would have come out with some pretty heavy remedies. While apparently simple, however, these remedies should strike at the heart of the problems, as previously discussed:

• Summary boxes containing key, bespoke information on price and non-price factors must be sent/displayed individually to each merchant for use in connection with... 
• New online quotation tools, which acquirers must provide to help merchants compare all available offerings. 
• Trigger messages must also be sent/displayed to prompt merchants to shop around, timed to coincide with the expiry of minimum contract terms or, where contracts are indefinite, provided at least once every 30 calendar days. 
• Lease/hire contracts for point-of-sale (POS) terminals must be limited to an initial term of 18 months, after which they should be terminable on a maximum of one-month's notice.

The regulator has directed 14 firms to implement the changes to POS terminal contracts from January 2023, and the remedies for summary boxes and trigger messages from July 2023. 

The independent sales organisations (ISOs) of those firms must also ensure they are compliant with the requirements. 

The PSR will monitor compliance and the impact of the remedies to determine whether any further action is required. 

I've advised merchants of all sizes and card acquirers, ISOs and payment facilitators; and these initiatives should aid the work required to search for the right acquiring service and organise a switch. 

If you need assistance, please let me know.

Will Your UK-issued Card Still Work In The EEA After Brexit?

Some confusion arising around this question today. The answer is that it should not be an issue, based on how card acquiring really works.

The EU has been clear since 2016 that, regardless of which type of Brexit occurs, UK-based financial institutions will no longer benefit from the ability to 'passport' their services into the rest of the European Economic Area (Norway, Liechtenstein and Iceland also participate in the financial services passporting arrangements). This position was emphasised in the relevant EU 'preparedness notice' in February 2018.

In the payments space about 350 UK firms rely on outbound passports around the rest of the EEA, while 142 EEA-based firms passport into the UK, as the FCA explained to Parliamentary select committee in August 2016.

More recently, the UK has said it will give the EEA-based firms a three year transition period to figure out how to continue serving the UK market.

So, in the payments space, the 350 UK-based banks, e-money institutions and payment institutions who currently rely on passports have been setting up additional new entities based in one of the remaining EU27 countries, from which they will service their customers who are resident in the EEA (as have I, on a professional basis, as UK professional qualifications will also cease to be recognised for providing services in the EEA). 

So, when Brexit occurs, the current residents of other EEA countries will be offered payment cards and accounts from an EEA-based entity, rather than a UK one.

That is not to say that a UK resident travelling in the EEA will not be able to make a payment using their payment cards issued to them in the UK under the typical international card schemes (which actually don't base their definition of Europe according to EEA and non-EEA distinctions, anyway). 

So, EEA-based merchants/retailers will still be able to take payment via their EEA-based payment provider (known as a 'card acquirer' or 'merchant acquirer'); and the UK customer will pay their UK card issuer as usual. The card scheme operator will still net-off amounts owed between EEA and non-EEA based issuers and acquirers and they will settle the difference with the schemes. It's just that the UK issuer in this example will then be among the non-EEA group.

Are UK Retailers Ready for The Ban On Payment Charges To Customers?

As mentioned previously, UK retailers won't be able to charge their customers a fee for using most forms of payment from 13 January 2018, and must refund any charges that violate the ban or limit. Certain surcharges within the scope of the regulations will remain permissible, but must not exceed the actual costs incurred in accepting the relevant payment method.

Customers will have teeth. Any contractual term requiring payment of a problem fee will be unenforceable to the extent of the excess charged, and will be treated as requiring the excess to be repaid. These rights can be enforced in the courts or alternative dispute resolution schemes. Customers might also initiate chargebacks for the excess amounts via their card issuer (or make a claim against the issuer under section 75 of the Consumer Credit Act).

Local Trading Standards authorities will have to consider complaints they receive from payers concerning prohibited charges, and must then decide whether to apply for an injunction or any other appropriate relief or remedy against the relevant payee or to accept undertakings to avoid court action. They must also notify the Competition and Markets Authority of any undertakings or the outcome of proceedings taken, which will be publicised for their reputational impact.

In addition, the authorities may seek enforcement orders under the Enterprise Act 2002. Where there is collective harm, the court can restrain continued or repeated conduct. 

I should add that the above restrictions apply to any "payee", not just retailers, as well as to bank transfers and direct debits in euros. They also cover business “payers”, not just consumers. However, excluded from the ban are charges for using commercial payment instruments - issued to businesses, public sector entities or the self-employed and limited to use for business expenses where the payments are charged directly to their account. But charges for using those must only cover the cost to the retailer of using that specific payment instrument.

The restrictions have been introduced in The Consumer Rights (Payment Surcharges) Regulations 2012 by the Payment Services Regulations 2017.

Update on 15.12.17: The government has now published its revised guidance on the Regulations, taking into account the ban introduced from 13 January 2018, as well as how to calculate appropriate surcharges where they are expressly permitted.