Learn how to draft the best framework agreement for e-money institution!
Do you wish to learn how to draft the best framework agreement for e-money institution (EMI) and other non-bank PSPs? Do you wish to avoid penalties imposed by the Financial Conduct Authority, adverse decisions of the Financial Ombudsman Service (FOS) and lawsuits? Do you want to know to what extent your B2B clients are protected? Want to refresh your knowledge of English case law applicable to financial services contracts?
I thought so, but in the beginning, let’s dig in some basic concepts that will help to guide us further. Since it is quite a specific topic you will need to put on your legalese hat and dive together with me into this journey that spans through the fields of legal obligations and rivers of boilerplate terms.
Usually, a standard set of terms and conditions (also known as standard form contracts, framework contracts, boilerplate contracts and contracts of adhesion) governs the relationship between the e-money institutions and customers. Such agreements establish a contractual framework dealing with key aspects of the EMI-customer relationship.
I got tired of seeing poorly-drafted legal agreements written in “Plain English” or even “Legalese.” Thus I decided to guide you through various considerations that you must know to draft the best possible framework agreement for e-money institution without breaching any of the legislative or regulatory obligations. In this article, we will look at the key aspects that must be borne in mind at all times. Moreover, you will understand the extent to which laws and regulations intervene in the EMI-customer relationship. With certain adjustments, the article applies to all non-bank PSPs such as Payment Institutions, Payment Initiation Service Providers and Account Information Service Providers.
Freedom of contract and its limitations
Freedom of contract is one of the most cherished aspects of individual liberty. And rightly so! Who would like for their freedoms to be taken away? None, at least when they have a choice. The principle of freedom of contract implies that contracts of parties that were freely and voluntarily concluded shall be enforced by courts and be free from interference. It is derived from the principle of laissez-faire establishing that the relationship between the parties will be free from state and judicial interference. It is a key concept of market capitalism underlined by a belief that the market can perfectly balance itself on its own. However, there are instances when one party has significantly less or even zero bargaining power and there should be freedom of contract limitations. They are applied in order to protect the party whose freedom was de facto taken away. In such instances, to preserve the rights of all parties involved, there is some intervention by the states to protect the weaker party.
The EMI-customer contract, when a customer is an individual consumer or a micro-enterprise, requires specific considerations. It can be argued that a weaker party is hardly capable of exercising its freedom of contract when dealing with a more powerful counterparty, especially when a contract is standardised. Therefore, when trying to draft the best framework agreement for e-money institution it is important to consider what constraints were placed on the EMI by the authorities.
What is the starting point in drafting the best framework agreement for e-money institution? Find the list of applicable laws.
The first step you should take when considering how to draft the best framework agreement for e-money institution is to make sure that you understand the regulatory landscape and all obligations that a company with e-money license has. To tell the truth, it sounds easier said than done and there is a number of sources that must be considered for this matter.
Any electronic money institution has a variety of obligations that emanate from the primary legislation that is further elevated by regulatory guidance. For instance, in the UK, there are the following primary legislative acts that outline in broad terms the requirements of what should be contained in a framework agreement (if you are reading it from another EU country, bear with me for a little while, they are substantially the same in other member states):
- The Payment Services Regulations 2017 (PSRs)
- The Electronic Money Regulations 2011 (EMRs)
- The Payment Account Regulations 2015 (PAR)
Apart from the core on which the conduct of EMIs is based, there is specific consumer protection legislation:
- The Distance Marketing Directive (DMD) and Financial Services (Distance Marketing Regulations) Regulations 2004 (DMRs)
- The Consumer Rights Act 2015 (CRA)
- The Consumer Protection from Unfair Trading Regulations 2008/1277 (CPUTR)
I bet as an EMI you do not provide credit service. However, if you do, then you must comply with the Consumer Credit Act 1974 (CCA).
Do I need only to know the laws for drafting the best framework agreement for e-money institution?
The answer is simple but quite disappointing – NO! The legislative acts are not the last point where you should seek knowledge, you must as well review regulatory guidance and rules. In these terms a UK authorised E-money institution must consider the FCA Handbook, specifically:
We have already discussed in detail how and to which extent BCOBS and PRIN are relevant for payment and e-money institutions in one of our previous articles and I will omit detailed repetitions herein. If you wish to dive into the particulars I strongly advise you to read that article. Furthermore, we will end the discussion with references to some of the cases that arguably apply to EMIs as well.
P.S. We know that you are too busy to read, so we got you covered. We got good and bad news. Only Chapter 2 of BCOBS (Marketing) applies to your Authorised E-money Institution. Luckily for you, other chapters apply only to banks and it is unlikely that you will be sued under Section 138D of the FSMA. At least for now. Unfortunately, the PSRs are quite similar to BCOBS in terms of consumer protection.
P.P.S. Dear Electronic Money Institutions in Lithuania, Netherlands, Ireland, Cyprus, Poland and other EU member states, the PRIN also applies to you, if you are providing services in the UK under cross-border passporting regime.
Why are the PSRs important when drafting the best framework agreement for e-money institution?
The PSRs is core legislation based on which e-money institutions (and other payment service providers for that matter) are operating within the United Kingdom. It implements the Payment Services Directive ((EU) 2015/2366) on a national level and hence the requirements discussed further will be substantially the same in all of the EU member states.
Of course, this legislative act is important and nobody should omit any of its provisions! Each and everyone should learn it by heart and quote it whilst having insomnia instead of counting sheep at night. However, when speaking about drafting the best framework agreement, Part 7 is of the essence. It details rights and obligations in relation to the provision of payment services. They outline changes in contractual information (reg. 50), termination (reg. 51), information rights (reg. 48-49, 50-62), charges (reg. 66), authorisation and executing of payment transactions including obligations and liabilities of both EMIs and its customer (reg. 67-96), and details the dispute resolution (reg. 101).
In terms of EMI-customer relationship, it is important to consider each of the abovementioned regulations in more detail and outline their implications for the agreements that are being concluded with the customers. It is especially important to consider regulations 48 to 54 which apply specifically to the payment services provided under a framework contract.
Big Enterprise Exclusion
PSRs protect not only consumers but also micro-enterprises and certain charities. Big companies are not covered. Hence, when you drafting your framework agreement, do not forget that you are legally allowed to exclude the applicability of reg. 40 to 62 inclusive; 66(1), 67(3), 67(4), 75, 77, 79, 80, 83; 91, 92 and 94 to relationships with your business clients are other than micro-enterprises and certain charities.
Information rights – I wish to know!
What can be more important than an informed decision? To tell the truth -nothing. That’s exactly the approach taken by the legislators. Regulation 48 obliges EMIs, in good time prior to the customer being bound by framework contract, to provide the customer with the information that will oversee the whole of the relationship. To briefly summarise it includes the following information:
- Information about the EMI itself;
- The information about the payment service;
- The information about the charges and fees;
- The information about language and communication;
- The information about the safeguards and corrective measures, including the liability;
- The information about the changes and termination of the agreement;
- The information about redress and dispute resolution mechanism.
Furthermore, regulation 49 requires the electronic money institutions to provide all of the abovementioned information to the customer upon request at all times during the time while the agreement is in force.
These two regulations establish specific information requirements for the agreements that are concluded with a customer. In effect, they limit the freedom of contract by outlining the terms that EMIs must include in their contracts with the customers.
Changes to the framework agreement – no rush
Regulation 50 details the rules dealing with the changes to the agreement. In this regard, it is important to note that the EMI is obliged to inform the customer of any proposed changes 2 months prior to the changes coming into force. Probably you are thinking now “Why should I delay changes?” Specifically, because of questions like this one. The authorities understand that in certain instances EMIs may abuse their customers by enforcing the terms that are far from perfect. In order to protect the consumers, there are limitations on the timelines within which the terms may be amended. Interestingly, even after reading this article – some electronic money institutions will continue the practice of changing the terms without proper notice. This should be avoided at all costs as the customer and thereafter the institution may suffer.
In case the customer disputes the changes that are due to enter into force, the customer has a right to terminate the agreement without incurring any additional charges and continue to use services until they become applicable. Hence, ending the relationship on the terms that were agreed prior to the notice. Importantly, this does not apply to the changes in the underlying exchange or interest rates or when the changes are more favourable to the customer. This regulation establishes limits on the unilateral amendments that the EMIs may make. In effect, it elevates the prerequisite of drafting the best possible framework agreement for e-money institution from the onset.
Termination of the framework agreement- what you least expected…
Regulation 51 deals with the termination of the agreement and how the EMI must treat customers. It states that the customer may terminate the agreement at all times unless the contrary was agreed between the parties, in which case the notice of maximum of 1 month may be introduced. Furthermore, it limits the possibility of the electronic money institution to impose the charges for termination if they are not reasonable when comparing to the costs incurred by the EMI while closing the account. As well, it establishes a 6-month time limit after which the EMI cannot charge the customer. Importantly, and what not so many of the EMIs are following – the EMI can terminate the agreement concluded for an indefinite period by providing at least 2 months prior notice (of course, subject to exceptions).
Charges under the framework agreement – how to properly earn some
Regulation 66 stresses the instances in which EMIs can levy charges against a customer. It explicitly lists 3 instances (a) the refusal of executing a payment order, revocation of a payment order, where customer entered incorrect identifiers for the execution of the transaction, (b) where there was a prior agreement for such charges, (c) where such charges correspond to the EMI’s actual costs. The last point (c) is of particular interest as it allows for the EMI to pass through the costs that they are incurring while providing the services to their customers.
Dispute resolution under the best framework agreement for e-money institution!
Another crucial point that is enshrined within the PSR is manner and timeliness for the dispute resolution to which EMIs must adhere. They are broadly codified within regulation 101 that stresses the timeframe for the resolution of any complaint received from a customer. The standard deadline is set at 15 business days within which the EMI must respond to the complaint and take the best efforts to cover all of the issues raised in the communication by the customer. Notably, this deadline may be prolonged to 35 business days in exceptional circumstances that are beyond the control of the EMI in question. The reply to the customer must be provided on a paper or another durable medium as are agreed between the customer and the EMI. While replying, the EMI must inform the customer of the availability of any alternative dispute resolution mechanism on which the customer may rely and inform about the possibility of lodging the complaint with the Financial Ombudsman Service.
In this article, I won’t go into details on the manner in which the disputes must be resolved as it is not the point. However, I would strongly advise reading DISP if you do not know the particulars. There are different types of complaints and they must be treated differently. Some of them even won’t fall under the responsibility of the EMI to resolve. However, it is always advisable to provide proper communication to the clients as it is part of the information rights enshrined in the legislation and the FCA Handbook (that will be discussed further).
Are the EMRs important for drafting the best framework agreement for e-money institution?
The rules for the issuance of e-money are codified and derives from the EMRs. So the answer to the above question is quite simple – they are essential in order to draft the best framework agreement for e-money institution!
Same as with the PSRs the EMRs is based on the EU directive and the requirements will be substantially the same in all of the EU member states. The EMRs have transposed the Electronic Money Directive 2011 (Directive 2009/110/EC) into the UK national legislation. The EMRs regulates issuance and redemption, including fees applicable to the e-money redemption (reg. 39-44), the prohibition to pay interest (reg. 45), and obligations that are applicable when a contract is terminated (reg.46). It establishes specific conditions on the manner in which the e-money must be issued and obliges e-money issuer to ensure that they are accounted in the agreement with the customer prior for it having any effect on the customer (reg. 40). As such, it lays down the ground rules to which each institution is subject.
Charges – here we go again… Limitations
Regulation 41 lists three instances when the redemption of e-money may be subject to a fee as is stated within the agreement with the customer: (a) the redemption is requested prior to the termination of the agreement, (b) the contract provides for a termination date and customer terminates the contract prior to that date, (c) the redemption is requested more than one year after the date of termination.
Notably, it establishes that any fees for the redemption that are levied on the customer must be proportionate and commensurate with the costs incurred by the EMI. Hence, the EMIs are prohibited from levying unreasonable charges on their customers who are redeeming the e-money.
Termination of the framework agreement – oh the pain, oh the time, oh the pressure on my capital
The EMRs establish that the EMIs may refuse the redemption of funds after the term of 6 years after the termination of the agreement lapses. In effect, it obliges EMIs to retain the funds and allow redemption for a period of 6 years. Hence, it is important to think twice prior to establishing any business relationship and the manner in which to deal with the remainder of the funds. In this regard, it is interesting that some EMIs are simply initiating outbound transactions to the source without customer authorisation. Do not follow the suit- it is an outward violation of the EMRs and rules of clearing systems. Furthermore, the customers have a claim on the issuer of the e-money – not the source!
The Payment Account Regulations 2015 (PARs)
The PAR, which implements the Payment Accounts Directive (Directive 2014/92/EU), introduced greater transparency of fees and charges, easier account switching and better access to basic bank accounts. Where applicable, any EMI that offers a payment account must use the terms set out in the linked services list in its contractual, commercial and marketing information (reg. 7). When speaking about the freedom of contract in EMI-customer relationship, the PAR establishes that EMIs are responsible for the timely provision of information that must be equally accessible to all customers. Hence, raising the obligation of transparency and once again reiterating information rights.
The Distance Marketing Directive (DMD) and Financial Services (Distance Marketing Regulations) Regulations 2004 (DMRs)
The Distance Marketing Directive provides protection for consumers whenever they enter into a financial services contract by distance means (such as online, telephone or mail order), including for payment services. Notably, for the EMIs the rules implementing requirements from the DMD can be found in the DMRs.
The DMRs list the information that must be provided to the consumer in a good time prior to the conclusion of the contract (reg. 7(1)) which includes the identity (including addresses and representative offices) (sch.1 (1-5)), characteristics of the financial services to be provided and their costs and risks (sch. 1 (6-9)), any limitations of the period for which the information provided is valid (sch. 1 (10)), arrangements for the payment and performance and the duration and termination of the distance contract (sch. 1 (11-16)), the applicable legislation and courts to which it is subject (sch. 1 (17-18)), the language of communication (sch. 1 (19)), dispute resolution mechanism and access to it (sch. 1 (20)), and the existence of any deposit guarantee or absence thereof (sch. 1 (21)). Notably, this information may be substantially reduced in case of a voice telephone communication (reg. 7 (4)) and will be limited to an identity of the person in contact and the supplier (sch. 2 (1)), description of the main characteristics and total price of the services (sch. 2 (2-4)), whether there is a right to cancel and how to exercise it (sch. 2 (5)), and any other information that the customer may request (sch. 2 (6)).
The obligations outlined under the DMRs are substantially the same as information rights within the already discussed legislation. However, they have some specific considerations such as voice telephone communication. In practice, such an approach is quite rare – but just in case you should keep it in mind while drafting your most competent framework agreement for your e-money institution.
The Consumer Rights Act 2015 (CRA)
The CRA regulates unfair terms in EMI-consumer contracts entered into on or after the 1-st October 2015, while Unfair Terms in Consumer Contracts Regulations 1999 (UTCCRs) that is a previous version of the regulation applies to agreements entered into between the 1-st October 1999 and 30 September 2015 inclusive.
The CRA protects consumers (individuals acting for purposes that are wholly or mainly outside that individual’s trade, business, craft or profession (S2(3)). Hence, any customer that is not a payment service provider will have additional rights stemming from the CRA. Fortunately, your B2B contracts are not covered.
Subject to the principles of conflict of laws (S53) the CRA inserts the following statutory implied terms into EMI-consumer contracts:
- there is an obligation to perform service with reasonable care and skill (S49);
- subject to specific requirements anything that is said or written to the consumer is a term of the contract (S50);
- if the price and/or time for the performance of a service is not defined, it is implied that the price and/or time must be reasonable (S51 and S52).
These implied terms cannot be excluded or restricted, and the EMI cannot exclude its liability arising out of such terms (S57). Regardless of how well you will draft the framework agreement, you must account for the obligations that are stemming from the legislation itself. Hence, in order to draft the best framework agreement for e-money institution, you must take into account not only what is explicitly stated but as well what is implied therein.
According to the CRA, the e-money institution cannot include a term that is contrary to the requirement of good faith as it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer (S62 CRA). It is an outright limitation of the freedom of contract and must be borne in mind at all times whenever designing whichever term. If you fail to take it into consideration and draft one-sided clause benefiting solely the EMI it can be in breach of the CRA and will be non-binding on the customer (if the agreement can continue to exist without such unfair term).
There are many examples of such terms provided in the CRA such as excluding the liability in the event of the death to the consumer resulting from an act or omission of the EMI (Part 1 of Schedule 2 para. 1 CRA). Lord Bingham in Director General of Fair Trading v First National Bank plc in para. 13 held that ‘fair dealing requires that supplier should not, whether, deliberately or unconsciously, take advantage of the consumer’s necessity, indigence, lack of experience, unfamiliarity with the subject matter of the contract, and weak bargaining position.’
However, it should be noted that transparent and prominent terms that specify the main subject matter of the contract, or price payable (S64) are excluded from the fairness test. Lord Walker in the Office of Fair Trading v Abbey National plc  UKSC 6 in paras. 39-45 provided that the amount of the price cannot be assessed for fairness while ancillary terms such as the timing of payment, cancellation rights may be assessed for fairness.
More detailed guidance regarding the application of the CRA for EMI-consumer contracts can be found in the FCA’s Finalised guidance FG18/7 (Fairness of variation terms in financial services consumer contracts under the Consumer Rights Act 2015) that includes reference to the ECJ case law that should be taken into consideration by EMIs, the FCA’s Unfair Contract Terms Regulatory Guide and CMA’s guidelines (e.g., July 2015 unfair contract terms guidance).
The Consumer Protection from Unfair Trading Regulations 2008 (CPUTRs)
The CPUTRs is a piece of legislation that is imposing a general prohibition on the businesses of all professions to provide unfair or misleading information to the consumers in any form. It applies to commercial practices during the whole lifetime of a consumer to trader transaction: advertising, marketing, entry into the contract, performance and enforcement.
While drafting the best framework agreement for e-money institution it is important to consider CPUTRs and its effects on EMIs. The following are key points that each EMI must provide in the framework agreement to the customer in order to make it adhere to the obligations outlined in CPUTRs:
- Disclosure on the extent of protection afforded by the safeguarding.
- Clarifying on the parts of the business that is regulated.
- Precisely describing the nature of the accounts.
It would be advisable to include a disclaimer which would clarify the abovementioned points and explain to the customer the nature of the relationship at the beginning of the best framework agreement for e-money institution.
Importance of the FCA Handbook for drafting the best framework agreement for e-money institution
The FCA’s BCOBS Chapter 2 applies to the EMI-customer relationship when an EMI’s customer is a consumer a micro-enterprise (less than 10 persons; turnover or balance sheet less than €2 million), charity (income less £1 million) (collectively customers). Chapter 2 establishes the principle of clear, fair and not misleading communication. In terms of drafting the best framework agreement for e-money institution, it should be considered as a part of general obligation not to mislead or misrepresent the terms enshrined in the agreement. Hence, whilst drafting the agreement the terms should not be ambiguous so as to not create uncertainty for the customer and subsequent clarifications and communication must be consistent.
Some PRIN rules apply to all EMI’s customers and some only to consumers. According to PRIN 2.1.1. the EMI must provide services with integrity, due skill, care to all its clients, pay regards to the information needs of its client, manage conflicts of interests, protect client’s assets. Additionally, the EMI’s customer must be treated fairly, and the standard of care for a payment service provider is higher when dealing with customers in the non-regulated field. These principles establish a general “code of ethics” to which EMI must adhere and they must be implemented throughout the business, including the framework agreement.
Case law and other laws and regulations
There is also case law that presumably affects freedom of contracts of EMIs with its customers. For example, some cases provide implied terms that can or cannot be contracted out (that were resolved vis-á-vis banks but arguably apply to EMIs as well) such as in cases Joachimson v Swiss Bank Corporation  3 KB 110, Libyan Arab Foreign Bank v Bankers Trust Co  QB 728 . Moreover, there are other acts and case law that have an effect on the substance of the framework agreement (e.g., exclusion of negligence liability in business to business contracts under Section 1(3)(a) of the UCTA, exclusion of fraud liability as in Frans Maas (UK) Ltd v Samsung Electronics (UK) Ltd  EWHC 1502 (Comm)). In order to draft the best framework agreement for e-money institution, all of such specific cases should be considered.
Final remarks on drafting the best framework agreement for e-money institution
Financial services are highly regulated, and the freedom of contract is limited in certain instances. The scope of the limitation depends on two factors: service at stake and type of an EMI’s client. The most protected kind of client is an individual consumer. The extensive amount of regulations remedies zero bargaining power of this type of client. Briefly, subject to a particular exclusion (e.g., price exclusion) EMIs cannot include unfair terms and must treat customers fairly.
Micro-enterprises, unincorporated business enjoy less protection, and the protection varies from service to service. Taking into consideration that there are fewer ways for them to seek redress, the EMI enjoys much flexibility in drafting contracts for such customers. Finally, bigger enterprises enjoy only some protection (e.g., some protection under the UCTA) and the principle of freedom of contract is preserved to a greater extent when the EMI deals with a big enterprise. The rationale for it lies in the firstly mentioned principle of bargaining power of the parties that are presumably stronger whenever speaking about bigger enterprises.
How PSP Lab can help you to draft the best framework agreement for e-money institution?
We sincerely hope that this brief overview allowed you to grasp the general obligations of the payment and e-money institutions while enhancing your knowledge of what must be included in the framework agreement. However, if you are still unsure about the manner in which to draft the best framework agreement for payment or e-money institution you can reach out to us and benefit from legal expertise on this matter.