Authorised push payment (APP) fraud continues to cause significant headaches for consumers and financial institutions alike.
To recap, APP fraud occurs when a fraudster will trick a victim into making a bank transfer to them, for example, by posing as a trusted organisation and encouraging the victim to send money to an account under the fraudster’s control, usually having intercepted legitimate correspondence between the victim and a third party (a conveyancer, for instance).
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In 2023 alone, data published by the Payments System Regulator (PSR) revealed that APP fraud amounted to a loss of £341m to UK consumers.
In light of this, new rules have come into force (from 7 October 2024) which require banks and other payment companies to reimburse fraud victims who have been tricked into sending money to scammers, up to a maximum of £85,000.
But despite these new rules working to improve fraud prevention and increase focus on customer protection, there are clear challenges on the horizon for consumers and financial institutions.
Significant benefits
For too long, victims have been at the mercy of a reimbursement lottery depending on who they bank with and whether that bank had signed up to the voluntary reimbursement regime. This new compulsory scheme should ensure the vast majority of victims are reimbursed and treated in a fair and consistent way if they fall victim to this terrible crime.
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By GlobalDataFurthermore, these new requirements will ensure that all payment firms involved will be incentivised to introduce more robust ways of identifying and preventing these scams from happening in the first place.
Firms have already made a good start in making changes and we expect to continue seeing new and innovative systems being rolled out to drive fraud out of our payment systems.
Following a consultation prior to 7 October 2024, the PSR decided on a lower cap than was initially proposed on the maximum amount that banks and payment firms would have to pay out to victims of authorised push payment (APP) fraud: £85,000, reduced from an originally planned £415,000.
Despite that, there’s no doubt that the new rules aim to shift the focus from innocent consumers having to suffer to shutting down scammers. At a time when instances of fraud are higher than ever, this is certainly a step in the right direction.
Challenges ahead
While the mandatory regime is hugely beneficial from a consumer protection perspective and it is hoped that these new rules will encourage financial institutions to improve fraud prevention and defeat APP fraud, there are concerns that the regime could have unwanted consequences and inadvertently lead to increased legal wrangles.
First, there are concerns that the emergence of mandatory compensation could in fact pave the way for more fraudulent schemes, potentially of a more sophisticated nature, with fake victims of fraud colluding with the fraudster who receives the money in the “scam” and then seeking reimbursement from the bank in question.
Payment providers must therefore focus on their prevention and detection mechanisms, as well as on their obligations to customers under the regime.
A second challenge that presents itself is the issue that, even with the reduced maximum reimbursement amount, smaller banks and customers of smaller banks will be disproportionately affected by the new rules.
Larger, more established banks, who will likely have previously signed up to the voluntary reimbursement regime, may give customers the benefit of the doubt when claims are submitted and compensate them for their losses, even when the consumer may arguably not have met the consumer standard of caution or have been careless when initiating a transfer.
Whereas smaller institutions will not necessarily be able to afford to pay compensation where customers have been careless and will probably apply greater scrutiny to the customer’s conduct.
It is therefore possible that the gap will widen between large and small banks in how they handle APP fraud, and we may even see smaller outfits allowing claims to be brought in front of the courts where they maintain that the customer’s conduct does not meet the standard required. The new regime could, despite its objective to the contrary, lead to more civil claims”.
What’s next?
The new rules to combat APP fraud are largely seen as a positive step toward reducing financial scams and offering consumer protection, but they come with trade-offs in terms of cost, privacy, and convenience.
Balancing consumer protection with the potential impacts on operational costs and user experience remains a challenge for the entire financial sector.
Consumers in the UK deserve the right to world-leading protection, and payment providers are heavily incentivised to improve anti-fraud protections and we maintain effective market competition and innovation.
Only time will tell as to the success of these changes and how this impacts fraud in the UK overall.
Caroline Greenwell is a partner at Charles Russell Speechlys
