As discussed in our recent article here, authorised push payment (or APP) fraud, where a fraudster convinces their victim to send them money via a bank transfer, often by posing as a genuine payee, is on the rise.
In an effort to combat this rise, a new APP reimbursement scheme introduced by the Payment Systems Regulator became mandatory on 7 October 2024. The scheme is designed to offer new protections against APP fraud for consumers making payments using mobile or online banking, or Clearing House Automated Payment System (CHAPS).
Payment service providers (PSP), including high street banks and building societies, as well as smaller payment firms and e-money firms are now required to follow the new rules, including requiring PSPs to reimburse victims. It is hoped that this will incentivise those firms to introduce ways of identifying and preventing APP scams.
In short, these arrangements mean that for payments made on or after 7 October 2024:
- Payment service providers must reimburse their customers for the money they have lost if they fall victim to APP fraud.
- In most cases, reimbursement must be made within 5 working days.
- Customers will be covered for losses up to £85,000 as standard, but if they suffer a loss in excess of £85,000, then can take up their case with the Financial Ombudsman Service.
A summary of the scheme
The scheme was first introduced in December 2023, but only on a voluntary basis. At that point, the cap on reimbursement was £415,000. However, following a review conducted by the Payment Systems Regulator, this was reduced to £85,000 when the scheme was made mandatory on 7 October.
This cap is in line with the maximum compensation available to customers under the Financial Services Compensation Scheme, which protects customers where financial services firms are unable to pay claims against them (for example, if banks are unable to pay customers’ deposits).
The cap was reduced due to concerns for the impact on smaller payment firms, who may not hold enough capital to make large reimbursements. It was felt that requiring smaller PSPs to hold more capital in order to meet potential fines might force them to set transaction limits, or mean that they would be unable to compete in the financial services market or invest that capital in anti-fraud measures.
What does this mean for consumers?
On its surface, this significant reduction in the reimbursement cap may seem like bad news for consumers. However, 99% of APP fraud claims are below £85,000 in value. This reflects the nature of APP fraud. High value scams are generally made up of lots of smaller transactions made over a prolonged period. If a fraudster were to issue a single fake invoice for a large sum, it might arouse suspicion. However, multiple fake invoices for smaller amounts spread over a period of several months might fly under the radar.
There is concern however that the compensation scheme itself might be the victim of fraudsters.
An APP fraudster and a payer could conspire to create a fake APP scam. The payer makes a payment to the APP fraudster solely with the intention of creating the illusion of an APP scam to defraud the bank. The payer could then report the alleged scam to their bank seeking compensation. Banks and other payment firms have limited scope to refuse to reimburse claims, and smaller PSPs may have very limited resources to conduct any investigation into false claims. This might incentivise fraudsters to make large numbers of fake claims for compensation in an attempt to defraud banks, and in turn could lead to more claims by banks against their customers for the recovery of stolen funds.
Alternatively, payers may choose to use the scheme as a means by which to obtain compensation in the event of a genuine dispute between the payer and payee. For example, a payer pays for goods using a bank transfer, but the payee fails to deliver those goods. This might not be a scam, but a genuine dispute between the parties. However, an unscrupulous payer might decide that making a claim for compensation is easier, cheaper and quicker than resolving the dispute through the courts. This may in turn lead to claims by banks against their customers or against payees in circumstances where false claims for APP fraud have been made.
Going forward, we can see that significant care will need to be taken by PSPs when considering reimbursement requests although with a limited ability to refuse reimbursement, as noted above, this may prove to be fertile ground for unwanted and time-consuming disputes.
Please reach out if you would like to discuss how the new rules might apply to your business.
