UK: Payment Service Providers: Misdirected Payments

Last Updated: 21 August 2014
Article by Michael Isaacs and Michael Hawthorne

What action should a Bank take when payments get misdirected? A new Code of Practice

The Payments Council has published its Code of Best Practice for Payment Service Providers (PSPs) faced with payments made to the wrong account, usually because a customer has entered incorrect payment information. This applies to both paper and electronic payment instructions (BACS, CHAPS, Faster Payments). The Code is voluntary but all of the big 4 and 8 other banks are already signed up.

Customer outcomes are a priority, and based around provision of information, minimising the risk of errors occurring in the use of payment platforms and customer interaction following mis-direction of a payment.

The Code is separate from the Payment Services Regulations 2009, and does not affect obligations on unauthorised payments under those Regulations (particularly Regs. 59-61).

Misdirected payments are a fact of banking life. Many occur because customers give incorrect details of the account to be credited. Some of these lead to claims against the paying bank for breach of duty, and the receiving bank and/or its customer for payment by mistake.

The new Code seeks to address this issue by:

1.Provision of Information: A requirement to give clear information to customers about how to make a payment and the consequences of getting it wrong (i.e. they might lose the money).

2.Preventative Practices: A requirement that the platform used to effect payment minimises the risk of error by containing features to capture errors as far as possible, and being easy to use for a variety of users.

3.Recovery practices: The need to ensure that procedures are in place to offer assistance in attempts to recover the payment in a timely fashion.

4.Customer Interaction. Requiring that the dealings between the PSP and its customer contain accurate information, support recovery of the misdirected funds and provide information within maximum timescales.

The 7 Code Commitments are:-

  • Working for the customer:  minimising the occurrence of misdirected payment and recognising the impact on customers when they occur. This includes working to "ensure that there is minimum impact during the recovery process on customers who have received funds in error".
  • Informing the Customer: making the customer aware of information needed to complete the payment, in a clear and concise manner, with prominence given to how the payment will be sent.
  • Designing for the customer: platforms and customer interfaces used will be designed to minimise the risk of mis-direction.
  • Query Handling:  an easily accessible and well publicised  "proportionate" queries process for mis-directed payments.
  • Effective Communication: once notified of a mis-directed payment, sending and receiving PSPs to have prompt and responsive communications with their customers, and show consideration for the customer query.
  • Effective investigation & Best Endeavours to Return the funds : which includes a trace of where funds went, contacting the receiving PSP to inform it of the issue, and assessing whether it was mis-directed. PSPs must use "best endeavours" to return funds identified as misdirected.
  • Signposting : both sending and receiving PSPs must tell the customer where to get further help, especially where no resolution was possible.

The Guidance on the Code includes specific practices which subscribers are expected to follow or to demonstrate alternative ways in which they meet the commitments.   

Some of the practices are easier to follow than others; for example, not reusing old account numbers for at least 13 months after account closure. Others involve potentially substantial work in redesigning platforms; for example much involves IT systems including "prompts" and warnings such as pop-ups stressing key information, or applying a mathematical algorithm to an account number to check its accuracy.

Recovery of mis-directed payments will need to be investigated by sending and receiving PSPs in line with the Credit Payment recovery framework, which includes

  • Identifying the mis-directed payment within 2 working days
  • The receiving PSP considering whether to "protect" the funds received by their customer

It is worth noting that nothing in the Code affects PSP's obligations under the Payment Services Regulations 2009 (PSR)  in relation to unauthorised payments, and so in the course of investigating a customer complaint about a mis-directed payment, the PSP needs to keep in mind  that:-

  • If there is a dispute about whether a misdirected payment was authorised, it is for the PSP to prove that the payment transaction was authenticated, accurately recorded, entered in its  accounts and not affected by a technical breakdown or some other deficiency (Reg. 60 of the PSR); and
  • Unauthorised payments must be reversed immediately (Reg. 61 of the PSR) provided notification from the customer was less than 13 months after debiting its account.

The substantive law on what PSPs/Banks can do is unchanged. Where there is an intractable dispute between the payer and recipient, this Code is unlikely to affect the outcome, as opposed to the means by which the paying and receiving PSPs will reach a position where formal court action will be necessitated.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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