12 February 2024
As the FCA's latest update on financial crime demonstrates, tackling fraud continues to be one of the major areas of concern of the regulators. Authorised push payment (APP) fraud, in particular, remains a key priority given the harm it can cause consumers. According to recent market research by VISA, one in three surveyed consumers have fallen victim to APP fraud. Data from UK Finance shows that in the first half of 2023, the volume of APP cases increased by 22% compared to the equivalent period in 2022 and the PSR's APP fraud performance report demonstrates that APP fraud accounted for 40% of total fraud losses in 2022.
It will therefore be some relief to consumers when the APP scam reimbursement requirement rules come into force on 7 October 2024. In this article, we summarise the background to the new regime and consider the key changes that payment service providers (PSPs) and consumers should be aware of.
On 19 December 2023, the PSR published its policy statement issuing its final decision on fighting APP scams and setting out parameters of the reimbursement requirement policy. This policy statement follows the June 2023 policy statement, which introduced the reimbursement requirement for payments within the Faster Payments scheme. Broadly, the aims are to:
By taking responsibility for protecting customers, the PSR expects that in-scope firms will develop effective data-driven interventions to change customer behaviour. The Treasury has also committed to legislate to provide clarity on risk-based delays to support fraud prevention.
The reimbursement requirement rules form part of the Faster Payments rules and are ancillary to the execution of transactions using the Faster Payments scheme. In the June policy statement, the PSR confirmed its intention to issue three legal instruments to bring the APP scam reimbursement requirement into effect.
In October 2023, the PSR published its first report on APP scam data (referred to above), covering industry performance for 2022, as part of a new ongoing commitment. The PSR's goal is to set minimum standards, define outcomes and align incentives for firms.
The PSR has issued three legal instruments that give effect to the reimbursement rules. These are PSR Specific Requirement 1 (SR1), PSR Specific Direction 19 (SD19), and PSR Specific Direction 20 (SD20).
Together these instruments combine to impose obligations on Faster Payments participants so that they are subject to the reimbursement requirement rules. SR1 imposes a requirement on Pay.UK to amend existing Faster Payments rules to include the reimbursement requirement. SD19 directs Pay.UK to implement a compliance monitoring regime for PSPs with regards to the reimbursement rules. SD20 directs Faster Payments participants to comply with the reimbursement requirement rules.
The key changes and takeaways from these are:
The policy statement confirms that the PSR is engaging extensively with other regulators regarding APP scams, namely the FCA, the Treasury, the Home Office, Ofcom, the Financial Ombudsman, the Department for Science, Innovation and Technology, law enforcement and other public bodies. The PSR will also work with the FCA and Pay.UK to ensure customers are treated fairly under the Consumer Duty.
The policy statement confirms the final approach to the consumer standard of caution, this includes that consumers should:
If one or more of these standards are not met, and it is deemed the consumer has done so in gross negligence, under the consumer standard of caution exception, the PSP is not required to reimburse the consumer. However, this exception cannot be relied upon in relation to a vulnerable consumer.
Alongside the policy statement, the PSR has also published The Consumer Standard of Caution Exception Notice, and The Consumer Standard of Caution Exception Guidance.
The reimbursement rules take effect on 7 October 2024, and in-scope PSPs will need to implement the rules by this date. PSPs may make voluntary reimbursements for APP scams before this date.
Prior to the start date of the rules, the legal instruments require Pay.UK to submit its compliance monitoring proposals to the PSR by 5 April 2024, and Pay.UK must publish the approved compliance monitoring regime and final version of the reimbursement rules by 7 June 2024.
In addition, Pay.UK is expected to share its implementation delivery plan with the industry in good time. The PSR plans to monitor its progress in accordance with the plan.
Separately, the Bank of England has announced on its website that it intends to implement a comparable reimbursement requirement for retail CHAPS payments. The Bank is working with the PSR and CHAPS direct participants, and other stakeholders, to create a similar model that is closely aligned to the Faster Payments reimbursement rules. It has so far confirmed that it will be in line with the same maximum reimbursement level of £415,000 per claim. The PSR is considering whether it is required to consult on a specific direction for CHAPS participants, if it does so, this consultation is expected by the end of Q1 2024.
Our team has significant experience in navigating payments regulation and can assist you with complying with the new requirements.