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Industry Reacts as PSR Finalises its Authorised APP Fraud Reimbursement Scheme

UK fintechs are concerned that the Payments Systems Regulator’s (PSR) decision to introduce a new fraud refund mechanism may disproportionately protect the wealthiest individuals and place a significant burden on payment firms, potentially impacting industry viability.

The PSR says it is taking ‘bold action’ and ‘leading the way globally’ by confirming its new reimbursement requirement that means UK banks and other payment firms must reimburse defrauded customers to a maximum of £415,000 from October 2024.

The regulator believes its new reimbursement requirement which will prompt a step-change in fraud prevention and see the vast majority of money lost to authorised push payment (APP) frauds reimbursed to victims. Losses due to authorised push payment scams were £239.3million in the first six months of 2023, according to UK Finance.

Chris Hemsley, MD at PSR
Chris Hemsley, MD at PSR

Alongside the new requirement to reimburse victims, the PSR is significantly increasing the incentives on all payment firms to do more to detect and prevent APP fraud from happening in the first place. This includes splitting the cost of reimbursement 50:50 between sending and receiving firms – putting incentives in at the receiving end for the first time.

Chris Hemsley, MD at PSR, said“The action we’re taking significantly increases the level of protection for people and puts the UK at the forefront of APP fraud protections globally. Our approach incentivises banks and other payment firms to prevent APP fraud from happening in the first place while ensuring victims are protected in a consistent way.”

“Failed to take on feedback”
Janine Hirt, CEO at Innovate Finance
Janine Hirt, CEO at Innovate Finance

However, Janine Hirt, CEO of Innovate Finance, an independent industry body representing the fintech community, says its members have serious concerns on the decision-making process and do not believe that the PSR has demonstrated an evidence based approach in setting the threshold so high.

She said: “Innovate Finance recognises that APP fraud presents a significant challenge for the payments industry, and that it is important for consumers to be adequately protected in the face of increasingly sophisticated APP scams.

“Unfortunately, the PSR has decided to adopt rules that set the upper threshold for reimbursements at £415,000, protecting the very wealthiest in society, at the expense of UK payment firms who will be made solely liable. Due to higher costs overall it is also likely that it is the vast majority of consumers who will end up paying more to protect the most well-off.

“Despite multiple rounds of consultation the PSR has failed to take on board feedback from across the industry on the potential impact that setting the threshold so high will have on payment firms, which could lead to loss of future investment in the sector, and in worst case scenarios firms failing due to the excessive reimbursement costs. This could ultimately harm competition and innovation in the UK payments sector in the future.

“At the same time, social media companies like Meta, where an estimated 60 per cent of all APP fraud originates, avoid any liability or responsibility for reimbursing consumers. We cannot tackle the issue of APP fraud solely by asking the UK payments industry to reimburse consumers. We need more action against firms like Meta to make them financially responsible.”

‘Incentivising scammers’
Virraj Jatania, CEO, Pockit
Virraj Jatania, CEO, Pockit

Requiring banks to reimburse essentially all reportedly fraudulent transactions of >£100 risks incentivising scammers or encouraging false reports of fraud, wrote Virraj Jatania, CEO and co-founder at London-based fintech Pockit in a LinkedIn post.

“There was an urgent need for decisive action to combat the rising tide of APP fraud. We applaud the commitment of the Payment Services Regulator. However, we have consistently voiced our concerns about the potential for unintended consumer harms. Requiring banks to reimburse essentially all reportedly fraudulent transactions of >£100 risks incentivising scammers or encouraging false reports of fraud.

“Some banks and fintechs might opt out of providing the same-day payments to which we’ve become accustomed. Smaller start-ups facing large new liabilities might exit the market altogether, damaging the UK’s fintech ecosystem.

“We will of course work with the PSR and make the new rules work, but when their impact is reviewed, we think there will be a chance to set thresholds that better strike a balance between protecting consumers, maintaining consumer choice, supporting the UK fintech sector and avoiding moral hazard.”

“Can’t lose focus”
Emma Lovell
Emma Lovell, chief executive, the Lending Standards Board

Emma Lovell of the Lending Standards Board – a voluntary body that works to promote fair lending – has welcomed mandatory reimbursement for APP fraud but stressed that reimbursement alone cannot address the broader issue of consumer harm.

“While mandatory reimbursement for APP fraud is welcome, we cannot lose focus on the importance of fraud prevention – the only way to truly prevent customer harm from occurring,” she said.

“Unlike the incoming framework, the existing Code requires signatory firms to take steps to prevent APP fraud from happening in the first place. It is vital that progress made in these areas does not fall away after October 2024.

“Alongside the new reimbursement rules, there is a clear need for a new APP Fraud Prevention Standard, overseen and enforced by an independent body, to ensure the industry has a consistent approach to stopping scams.

“APP fraud means people are navigating a minefield of threats every time they shop online, click a link, or answer a call – with this type of fraud becoming increasingly complex, widespread, and convincing. As well as a financial impact, victims of fraud can also suffer devastating emotional repercussions. Reimbursement alone cannot reverse the emotional distress that APP fraud causes, nor can it prevent the proceeds of fraud from being channelled towards criminal activity. Without a consistent approach to prevention, the risk is that APP fraud – and consumer harm – will accelerate again.”

Working with Pay.UK

The PSR is actively collaborating with Pay.UK, the operator of the UK’s interbank payment systems, including BACS, Faster Payments, and the cheque system, along with payment firms, to ensure their full readiness in implementing the new requirement next year.

A spokesperson for Pay.UK also said: “We welcome the publication of the PSR’s finalised legal instruments for the APP reimbursement regime which place requirements on payment service providers to reimburse victims of APP fraud.

“We are playing our part, as directed by the PSR, in implementing the regime next year. We will continue our engagement with industry, regulators, and other stakeholders, includes sharing our latest implementation plans as soon as possible.”

Moving forward

Consultancy Cognizant has outlined measures to help firms with the new reimbursement requirements. It says firms must prioritise investment in employee and customer awareness, collaboration and information sharing, reimbursement mechanisms, building effective communication channels, monitoring, reporting and updating policies and procedures.

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