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Surcharges and card payments: what does the law say you need to do?

16 Aug 2019

Surcharging is the practice of merchants, businesses and anyone taking payments charging a fee for using a particular payment instrument, eg. debit or credit card, e-money account, etc.  It’s a practice that was made unlawful (subject to exemptions) by a change in the law in January 2018, so that anyone taking payments for goods/services cannot surcharge consumers for making a payment via a particular chosen payment method.

One of the key drivers to changing the law was to provide clarity for consumers, particularly as some charges only became apparent several steps into the purchase process; at that point, many customers would be inconvenienced and/or unwilling to cancel a transaction.  In some instances those unexpected charges could run into hundreds of pounds – when students paid tuition fees using credit or debit cards, for example.

It was also intended to level the playing field for payment institutions, challenging the dominant position of Visa and Mastercard.

The law therefore seeks to give confidence to consumers about what the actual charge is for goods/services that they purchase, although some businesses and institutions still apply a charge for taking payments by a chosen method, which they can only do if there is an exemption under the Regulations that applies to them.
 
What the law says
Essentially, under the Regulations (Consumer Rights (Payment Surcharges) Regulations 2012 as amended in 2017 to align with the Payment Services Directive (2)), if a payer is charged more for using a particular method of payment, whether by way of an additional or higher fee or because other methods of payment attracted a discounted fee, this will amount to a surcharge.  Regulation 6A expressly prohibits a ‘payee’ from imposing a surcharge on the ‘payer’ for using a particular method of payment. The prohibition applies where both:
  • the payment service provider of both the payee and the payer are located within the EEA; and
  • the surcharge relates to one of the payment methods listed in Regulation 6A(1)(a)-(c).

The Regulations apply to sales in the UK and the EEA (ie. EU countries plus Iceland, Liechtenstein and Norway); if direct sales are made to countries outside the EEA, then the rules don’t apply, although those sales may be affected by local laws.

If the payment service providers of both the payee and payer are based in an EEA country, then the ban on charges will apply.  However, if only one payment service provider is based in an EEA country, then the ban does not apply, but any fee charged should be limited to the level of the actual costs incurred.

The Regulations also make it unlawful to charge additional fees for payments made by American Express, PayPal or Apple Pay.  This is primarily aimed at EU payers, but institutions should still be cautious about any surcharging that they might want to impose on any payer using these payment methods who is based outside the EU (https://www.gov.uk/government/news/card-surcharge-ban-means-no-more-nasty-surprises-for-shoppers).

Breach of the Regulations results in the payee having to repay the surcharge, irrespective of whether the payee (as opposed to its payment service provider) derived any financial benefit from it.  This is because the Regulations imply a term in the contract between the payer (eg. the student or their parents) and the payee (eg. the education institution) for the surcharge to be repaid.  In addition, a consumer can also make a complaint to Trading Standards, which could potentially result in negative publicity in addition to any investigation / action which Trading Standards decides to take. This has been seen in the sector already: https://www.bbc.co.uk/news/uk-england-46876577.

If an institution is allowed to surcharge under the Regulations, then it is obliged to highlight this fact to payers; failure to do so constitutes a breach of the Regulations.  If the payment is being solicited through marketing statements such as ‘No fees’, or similar, in order to entice a payer to make payment and a surcharge is then applied to card payments, this is also arguably a misrepresentation which, amongst other things, could give rise to a claim in damages.

In addition to the Regulations, Regulation 40 of the Consumer Contracts (Information, Cancellation and Additional Charges) Regulations 2013 prohibits additional payments being charged to a consumer when they have not expressly agreed to pay before entering into a contract.  Pre-ticked boxes for additional payments are not allowed and consumers will not be liable for any costs which they have not been told about pre-contract. 

The Consumer Protection from Unfair Trading Regulations 2008 also need to be complied with, in terms of providing transparent information to consumers about payment surcharges.  Any unfair practices by traders which affect the transactional decision of a consumer will breach these regulations, where a trader misleads (by act or omission) consumers about a payment surcharge.
 
Third party providers
Across the UK higher education sector in particular, institutions have made use of third party payment providers with a view to trying to improve the payment experience for international payers.  Often they are able to offer the ability for international payers to remit funds in a more convenient -and often more cost effective - manner than via the local retail banking infrastructure, typically via bank transfer.

The use of these third party providers for processing payments is often seen as potentially providing a financial benefit to institutions, by ‘removing the costs’ associated with the processing of the payment, ensuring the correct sterling value is received and/or reducing staff time and costs around payment reconciliation.

Historically, third party providers have been remunerated through a combination of the exchange rates applied and any service fees incorporated into their pricing models. 

Where a third party offers payment methods which are affected by surcharging legislation, then it is important for institutions to understand and ensure that it is compliant with relevant legislation and that it is adequately protected in relation to the third party’s actions.

Some third party providers are looking to offer a ‘zero cost’ alternative to institutions processing card payments directly, by offering to absorb and/or offset the acquiring fees.  This ‘zero cost solution’ means that institutions remain able to accept card payments, albeit that those payments are then taken and processed via a third party payment provider.  However, it seems that often third party providers will look to pass the acquiring fees on to the payer rather than the institution.  The use of this model (charging fees to the payer) needs to be assessed in light of the UK laws, as there are potential pitfalls.
 
Impact on businesses and institutions
Businesses and institutions must ensure that they are using payment providers which allow them to make the right representations to consumers about any charges they will be paying, ensuring full transparency.

Surcharging for consumer card payments, or discounting for non-card payments, is not permitted for payments from within Europe.  Any institution using a third party payment provider which is surcharging for EU-issued consumer card payments will be leaving itself open to claims for repayment of those surcharges from payers.    

As mentioned above, consumer cards from outside the EU do not have a wholesale ban on surcharging, however it is likely that surcharging legislation may still ban surcharging which exceeds the cost of processing the payment.
 
If a third party payment provider is physically processing payments outside the EU, strictly speaking the Regulations do not have technical effect on those payments.  However, it is still risky for institutions to surcharge in these instances because the institution is still likely to be deemed the recipient of the funds (payments would be processed by a third party payment provider ‘on behalf of’ the institution) and therefore subject to the laws where the institution is based; for UK institutions, that brings the Regulations into play.

Institutions will need to have appropriate legal agreements in place with any third party to explicitly protect themselves from any liability they may incur due to the practices of the third party payment provider – this would include contravention of the Regulations or other applicable laws.

Due to the ban on surcharging, institutions may want to shop around to find a better deal with a merchant acquirer to lower their costs, or consider whether they need to increase their headline prices / fees payable by all consumers in any way to cover the transaction processing costs (although this might not be attractive in the education sector).  Care should be taken about encouraging non-card payments, however: incentives to pay by other methods can be offered, but not discounts for a non-card payments, which would still be classified as a surcharge.
 
Advertising fees online
Businesses and institutions will also need to take care when displaying prices and details of any rates or fees that may apply on their website or otherwise: wording will need to clearly explain what fees are being charged.  A third party payment provider may supply sample wording to include on a website explaining the fees charged, however it would be unwise to simply ‘copy and paste’ that wording without first checking that it does not breach of the Regulations.

All references to credit or debit card fees should be removed.  However, if you plan to make charges for commercial cards, or if you are using a payment service provider based outside the EEA, then you must clearly state this on your website (and any other materials) and calculate this so that it only covers the cost of taking the payment.  Your website and other materials must also clearly state if you are not accepting certain types of payment methods.

The Advertising Standards Authority’s CAP Code relating to good practice for trading with consumers also states that surcharging must not be done in accordance with the Regulations and that advertised prices must include all relevant fees: https://www.asa.org.uk/advice-online/compulsory-costs-and-charges-credit-and-debit-card-fees.html  The ASA keep track of websites and how consumers are presented to in relation to advertisements.  The ASA sometimes focuses on specific sectors (eg. the travel industry), but for institutions, the key point to note is that advertised headline prices must include all fees/charges, in order to be considered ‘fair’ to consumers in accordance with laws in the UK, as set out above.
 
The bottom line
The laws make it very difficult for institutions to surcharge on payments made by an EU-issued consumer debit or credit card.  Non-consumer and international cards could potentially attract a surcharge, but this must be clearly labelled to remove legal risks associated with appearing to be concealing these additional charges, and the additional charges must reflect only the true cost of processing.

If you wish to surcharge for card payments, whether non-consumer and/or non-EU, you must be very careful to ensure that surcharges are clearly advertised and demonstrably linked to the cost of processing. However, this may well lead to inconvenience, additional cost and risks of funds not being received in a timely manner, by encouraging payers to seek alternative payment methods.

Third party payment providers offering ‘zero cost’ solutions must be able to demonstrate that the method of set-up for such solutions is in fact legal; the contracts that you enter into with such providers will need to offer some comfort that the solution will not put the institution in breach of the Regulations or other applicable laws.

In order to stay on the right side of the Regulations, you must not surcharge EU consumers for taking payments, and only charge businesses the actual cost of processing the transaction.

If you utilise a third party payment provider, consider very carefully which payment provider offers the institution the ability to be able to comply with the Regulations relating to surcharging.  If you are unsure, seek independent legal advice and check any proposed payment provider’s terms to confirm that this is something that they take responsibility for, so that the institution stays the right side of the law.
 
Kelly Mills (Partner) and Debbie Venn (Partner)
 

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