Mandatory recompense: new UK rules to tackle APP fraud

January 2025  |  FEATURE | BANKING & FINANCE

Financier Worldwide Magazine

January 2025 Issue

Fraud is the most commonly occurring crime in the UK. It affects the UK both economically and socially, and accounts for over 40 percent of all reported crime in England and Wales.

According to the UK’s Office of National Statistics, financial fraud was the most common crime type reported between April 2022 and March 2023 (according to the latest available figures), with an estimated 3.5 million incidents of fraud experienced by adults aged 16 and over.

And of all the types of financial fraud, the largest both in number of incidents and value of losses is that of authorised push payment (APP) scams, which rose by 12 percent to 232,429 in 2023 at an estimated cost to the UK economy of £459.7m.

During an APP scam, the fraudster tricks their victim into willingly sending a large payment to a bank account that the fraudster controls. They manipulate their victims into making payments, or sharing personal details, under false pretences. Often they will pose as a well-known legitimate business or a government body in order to win a victim’s trust. Typically there is a demand for the victim to act quickly.

“This type of fraud exploits the speed of direct electronic payments, with victims often believing they are making payments for legitimate reasons,” says Robert A. Chaplin, a partner at Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates. “In response to the increasing incidence of APP fraud, UK regulators and industry stakeholders have been seeking ways to better protect consumers and ensure that victims have a clearer path to reimbursement.”

New rules

Previously, there had been no requirement for banks to refund victims of APP fraud and the majority of banks and payment service providers (PSPs) voluntarily compensated customers tricked into sending money to fraudsters.

However, in groundbreaking new protections announced by the Payment Systems Regulator (PSR) – the body tasked with overseeing payment systems in the UK – from 7 October 2024, refunds have been made mandatory.

Under the new rules, payment firms, including banks and building societies as well as smaller payment firms and e-money firms, are required to share the cost of reimbursing victims of APP scams, splitting the burden equally with the banks receiving fraudulent funds.

This shift in liability represents an important moment for financial institutions, which will need to prioritise proactive and technologically advanced approaches to fraud prevention.

“Our new measures are world-leading,” says Claire Simpson, senior policy manager at the PSR. “By introducing them, we are ensuring all payment firms – including, for the first time, those that bank the fraudsters, face strong incentives to stop fraud from happening in the first place. And if people do fall victim, our rules provide a consistent minimum standard of protection across the board.”

Key provisions

The PSR’s new reimbursement requirements mark a step change in the culture of the payments environment and mean victims of fraud can expect significantly greater protection.

Everyone making a payment via Faster Payments or the Clearing House Automated Payment System (CHAPS) from one UK bank account to another will be covered.

The vast majority of consumers can expect to be reimbursed within five business days of making their claim, with the new rules seeing over 99 percent of claims by volume covered.

People will be covered up to £85,000 as standard, but banks and payment firms can still reimburse above that amount. Firms may also choose to apply an optional excess of up to £100, though this cannot be applied to vulnerable consumers.

Anyone who suffers a loss exceeding £85,000 can still raise their case with their payment provider and if they remain unsatisfied, they can take their case to the Financial Ombudsman Service, which is independent and looks at each case on its own individual merits.

In addition, the PSR has reduced the maximum compensation from a previous proposal of £415,000, stating that the new cap of £85,000 would cover more than 99 percent of claims. “The few exceptions to reimbursement include where the customer has acted fraudulently or with gross negligence,” adds Ms Simpson.

World-leading protection

While the new reimbursement rules are a significant step by the PSR to tackle the growing number of APP fraud cases, it should be noted that they are not without concern.

“The new rules may result in PSPs incurring significant costs, particularly smaller firms that sit outside the existing contingent reimbursement model code,” contends Mr Chaplin. “And smaller firms with less capital may also struggle to reimburse customers, which may prompt some to stop offering Faster Payments services.”

For the moment, however, the consensus is that the UK is receiving world-leading protection and PSPs have a strong incentive to prevent fraud. “This is a major reform and we will continue to work with industry to support ongoing effective consumer reimbursement,” concludes Ms Simpson. “We will also be closely monitoring the impact of the new requirements, including evaluating their effectiveness after 12 months of operation.”

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