The Estonian Banking Association’s explanation concerning the substantiation of a refusal to provide payment services
An amendment to the Credit Institutions Act obligates a bank to substantiate a refusal to provide payment services (subsection 91 of § 89 of the Credit Institutions Act). The aim of this document is to provide an overview of problems that have arisen in practice and to explain the fulfilment of the substantiation obligation primarily for the viewpoint of the prevention of money laundering and terrorist financing. Before terminating a payment service contract or refusing to conclude a payment service contract, a bank must ensure through diligent internal analysis that risks are managed and not avoided without justification (the implementation of the financial inclusion principle instead of an undesired exit from risks).
1. Scope of application and general observations
Subsection 91 of § 89 of the Credit Institutions Act stipulates that a bank is required to substantiate the refusal to enter into or cancellation of a payment service contract in writing, including to give information to the person on the right to appeal against the refusal or cancellation. However, the bank cannot disclose the substantiations if this is in contradiction with the provisions of the Money Laundering and Terrorist Financing Prevention Act or any other act, or in a situation where the disclosure of information may have an adverse effect on the exchange of information between the credit institution and law enforcement or security institutions or cooperation with a foreign or international organisation.
It was concluded as a result of a discussion at the Banking Association that subsection 91 of § 89 of the Credit Institutions Act must be implemented both in the case of a regular and an extraordinary cancellation of contracts. This conclusion is also supported by the opinion of the Ministry of Finance presented to § 130 of the draft act as well as by the wording of the provision, which does not make a distinction with regard to substantiation on the basis of the type of cancellation of contracts. It is important for the substantiation of the end of a payment service contract to show whether the termination is regular or extraordinary.
With regard to the extent of substantiation, the banks also ensure not to disclose more specific monitoring of the business relationship that may be construed as a banking or trade secret, or information concerning third persons.
The reference to appealing should include the right to file an appeal with the bank and the court and, in the case of consumers, also with the Consumer Dispute Committee.
2. The content of a substantiation upon regular termination: risk appetite
A business relationship is generally terminated in a regular manner due to reasons arising from the bank’s existing or altered risk appetite (heightened risk circumstances), and the relevant references are therefore presented as specifically as possible in order to ensure the transparency of the cancellation. In compliance with the principles of financial inclusion and transparency, there is an increasing trend of disclosing the risk appetite to customers, e.g. via the general terms and conditions, while ensuring that irrelevant and internal circumstances are not disclosed as a substantiation.
It was found that as clause 1 of subsection 91 of § 88 of the Credit Institutions Act is intended also to apply to regular cancellations (risk appetite), the risk appetite is generally and understandably explained to customers, but risk appetite documents or the principles of the development of risk appetite do not have to be annexed to a substantiation. The details of a risk appetite document are not subject to disclosure, and the use of risk appetite in a substantiation depends on the bank’s decision to make its risk appetite publicly accessible to customers, e.g. by posting it on a webpage.
3. The content of a substantiation upon extraordinary termination: due diligence measures
Upon an extraordinary termination of a business relationship in connection with the implementation of the due diligence measures related to the prevention of money laundering and terrorist financing, the bank can substantiate as specifically as possible according to the due diligence measure that cannot be implemented, including by referring to customer communication circumstances (requesting information and/or failure to receive/insufficient/contradictory information). If the implementation of due diligence measures is impossible (extraordinary cancellation), substantiation can be provided by referring to the general terms and conditions or by describing the situation where the implementation of due diligence measures is impossible.
4. Substantiation in the case of suspected money laundering and terrorist financing
Besides the substantiation obligation, the banks also have to fulfil a confidentiality obligation in connection with notices of suspected money laundering or terrorist financing (also called the tipping-off prohibition). It was found that in the case of suspected money laundering or terrorist financing, the required substantiation is minimal and may primarily be a reference to the general terms and conditions. The disclosure of information related to Financial Intelligence Unit notices is prohibited.