New rules on payment surcharges in consumer contracts

At the end of last year, the Government implemented Article 19 of the Consumer Rights Directive through the new Consumer Rights (Payment Surcharges) Regulations 2012. These regulations aim to address ‘above-cost’ payment surcharges made by traders.

Payment surcharges (where a trader imposes a fee on customers depending on the type of payment method they choose to use) have become a popular way for traders to reduce the headline cost of goods or services when trading in a competitive market. Payment surcharges are particularly notorious in the budget airline industry (where substantial charges are often imposed for using a credit card), but in recent years have become increasingly common in both on and offline consumer contracts.

The new laws are aimed at ensuring that any surcharges are note used by traders as a mechanism for generating additional revenue for the trader.

So what do these regulations actually change?
The new regulations prohibit traders from imposing payment surcharges on customers where the charge exceeds the cost to the trader of using the payment method – in other words, ‘above cost payments’. They are payment method agnostic – that means they apply not just to surcharges imposed when using a credit or debit card, but also other methods such as cheques, cash and direct debits.

In addition to payment charges, the regulations are also applicable to discounts offered for paying using particular methods (for example, direct debit).

The regulations apply to all consumer contracts (both on and offline) in sales or services, digital content and most utilities, and also extend to package holidays, which is beyond the scope of the Directive. The rationale for including package holidays is that a failure to extend the prohibition would produce inconsistencies between packages holidays and individual, separately purchased, components of a holiday (for example air travel).

The regulations detail some excluded contracts including certain financial service and social services contracts.

Charges that do not vary depending on the payment method (and therefore apply to all payment methods) are not affected by the regulations.

How do you calculate what charges are reasonable?
Neither the regulations nor the Directive define what the “cost to the trader” is for the purposes of determining what charge is appropriate. In its guidance (see link below) the Department for Business Innovation and Skills states that only direct costs are relevant, but that these will vary depending on the size of the trader.

In relation to card payments, the guidance lists the following types of costs as being relevant:

  • The Merchant Service Charge, which traders pay to their acquiring bank
  • IT and equipment costs used for particular means of payment such as card terminals, for example point of sale devices
  • Risk management – active fraud detection and prevention measures which vary depending on their business and whether transactions take place face to face or remotely
  • Processing fees such as charges for reversing or refunding a payment
  • Any operational costs that can be separately identified as internal administrative costs arising from activities dedicated exclusively to card payments. For example, where traders opt to buy in services from intermediaries who provide equipment, fraud detection and processing services (especially online payments) for card payments, they should be able to recover the costs they incur through a payment surcharge.

When does this change come into effect?
The regulations come into force on 6 April 2013 and apply to all contracts entered into on or after this date, although new businesses (which begin trading between 6 April 2013 and 12 June 2014) and micro-businesses (less than 10 employees) are given until 12 June 2014 before the regulations apply.

Do the regulations have any other powers?
In the event of non-compliance trading standards are provided with powers to investigate.

Trading standards can also seek undertakings from traders or apply for injunctions in the event of non-compliance. The regulations can also be enforced under the Enterprise Act 2002 (Part 8 Domestic Infringements) Order 2013. Specified enforcers can apply to the courts for enforcement orders if they become aware that a trader has or is likely to engage in conduct which constitutes an infringement.

What do traders need to do now?
Any trader that currently imposes payment surcharges should review their charges to ensure that they are compliant with the new regulations.

Further information…
The Department for Business, Innovation and Skills has published helpful guidance including Q&A’s on the new Regulations whith can be accessed on the BIS website (PDF).

Martin Sloan

2 Responses to “New rules on payment surcharges in consumer contracts”


  1. 1 Peter Dalziel March 30, 2013 at 10:16 am

    So Martin, where a trader charges 0% extra for people using that trader’s own brand Visa card and 2% for other brands, that would that be (automatically) unfair and against the law?

    • 2 martinsloan April 2, 2013 at 9:37 am

      Peter – thanks for your comment. Whether the charge is unlawful or not will depend on the “cost” to the retailer of accepting each of the payment methods.

      Interestingly, the BIS guidance refers only to “costs” borne by retailers and not any relevant revenue (for example, any revenue shared with the trader for spend on a trader-branded credit card). If the discount offered for using the branded discount is equal to (or les than) the revenue share received by the trader then it may be arguable that the reduced charge is lawful, as there is a lower net cost to the retailer of accepting that payment method.

      The guidance also appears to be silent on “below cost” charges. However, if a discounted charge is offered by a trader on one method of payment and not the other, then it is possible that this may still be unlawful as the higher charge may be viewed as excessive/cross-subsidising. The exception to this may be where the “discount” is funded by the card scheme through lower merchant acquirer fees, which would lead to a lower demonstrable cost to the retailer.


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