British financial services will face a major new regulatory requirement to adhere to from next week, the authorised push payment (APP) fraud reimbursement rule.
Introduced by the Payment Systems Regulator (PSR), the rule will require payments firms to reimburse victims of fraud up to £85,000, split 50/50 between the paying and receiving company.
When the plans were first unveiled late last year, the reaction from the payments sector was and continues to be, rather mixed. Some argue that it is only fair that victims of fraud are reimbursed to the fullest extent possible by the payments firms which failed the transactions.
In contrast, companies and trade bodies state that they recognise the need to combat fraud, but do not think reimbursement is quite the right answer. Others have raised concerns about the financial burden reimbursement could place on companies.
In comments sent to Payment Expert this week, Ignatius Adjei, UK Financial Services Head of Anti-Fraud Services, KPMG UK, said: “While broadly positive, the new rules aren’t without drawbacks; there are concerns that it could see some people exploit reimbursement for personal gain. For example, making false claims in the knowledge that their bank will reimburse them.
“While the maximum compensation payable was reduced from £415,000 to £85,000 in September to minimise this issue, it may not be enough to curb fraudulent behaviour. As such, banks are continuing to ramp up their controls in the prevention of fraud to determine whether a claim is in fact real.”
Opinions divided but unified strategy needed
The PSR’s incoming requirements have been subject to extensive debate, which has led to some changes. Initially, the cap on reimbursement was set at £415,000 but was reduced to £85,000 after industry lobbying – though some such as The Payments Association, a trade body, argue that it should be dropped even further to £30,000.
Responding to the PSR’s decision, which has been since subject to a consultancy, a number of payments stakeholders were positive. ClearJunction, a payments solutions provider, described it as striking ‘a better balance between protecting consumers and ensuring the continued innovation’ of UK fintech, for example.
Others, however, were critical of the reduction. Prior to PSR announcing the change, Dan McLoughlin, Fraud and Security Specialist at fraud prevention and AML firm Lynx, stated that the reduction ‘dramatically takes away a big part of banks’ financial motivation to prevent fraud’.
Regardless of industry opinions, stakeholders will have to accept and adopt the £85,000 reimbursement cap whether they like it or not. It is hard to deny that victims of fraud deserve compensation for their losses, though questions do remain on who should share responsibility for it.
Should Big Tech and social media also shoulder some responsibility for reimbursing victims? Payments firms and banks, and apparently the Labour government, seem to think so. Meta also seems to have taken these comments onboard, partnering with NatWest and Metro this week.
Moving forward, the discussion needs to incorporate fraud prevention, not just reimbursement. This is something The Payments Association has been arguing for some time, and HM Treasury also seems to be prioritising it with new powers for banks unveiled yesterday.
Additionally, the payments and banking sectors may be spurred on by the new rules to look at how internal systems and processes can be enhanced to detect and prevent fraud, perhaps via the use of Artificial Intelligence (AI) – though the use of AI by fraudsters itself is yet another threat to deal with. More consistent regulation from above will only make the process of upgrading fraud prevention toolkits smoother.
KPMG’s Adjei concluded: “On a positive note, where there have previously been inconsistencies in outcomes for customers who report APP fraud, the new rules should make reimbursement more straightforward and reliable.
“Also, the legislation encourages extra support for vulnerable customers, particularly when determining if gross negligence played a role in the loss. This reflects an ongoing effort to safeguard these customers, necessitating that financial institutions be more mindful of consumers’ personal situations.”
