The Payment Systems Regulator (PSR) has recently announced significant changes which will enforce  mandatory reimbursement regime for Authorised Push Payment fraud proposed for implementation by 2 April 2024.  The proposals  present  significant challenges for financial institutions preparing for the far-reaching reform.

Practical difficulties

An overarching concern with the measures is the complexity of balancing the need to protect consumers from fraud and not causing excessive friction in the processing of payment.  The challenges are illustrated by a UK Finance statistic that 31% of financial institutions are having difficulty measuring and understanding effective ways in combatting scams.  This is even prior to the new measures, which the PSR expects Payment System Providers (PSPs) should use as a springboard to expand the mechanisms to combat fraud, such as wider and more tailored use of customer warnings and freezing accounts.  There are also concerns with the introduction of additional information sharing requirements on PSPs recently confirmed by Pay UK, which require the collection and publication of performance data.  The broad further disclosure duties overlook the extensive existing data sharing burdens on PSPs and the limited effective mechanisms to facilitate information sharing across the sector.  The expected implementation date is a further ongoing concern because it is widely regarded as unachievable. 

Balancing other legal requirements

There are several legal requirements that intersect with the new requirements ; including Financial Conduct Authority (FCA) regulations and the common law, which also need to be assessed.

The PSR guidance has reiterated that is will primarily rely on several existing FCA rules in judging compliance with the scheme.  It is therefore essential to ensure consistency with approaches in applying the PSR and FCA rules.  In practice, this will be difficult.  For example, there is potential tension between aspects of the two regimes.  The PSR envisages PSPs should expand bespoke warnings for different types of customers and improve fraud recovery measures, even if these steps create friction for customers.  However, the FCA Consumer Duty envisages that firms should ensure customers are satisfied with the services offered, including speed and compliance with payment instructions and has warned firms that they should not be creating excessive friction when processing payments which potentially creates hardship for consumers.

Outside the scope of the scheme, payment instructions should be consistent with existing common law obligations. In this arena, primarily international payments, the Supreme Court has recently confirmed that banks should generally be entitled to treat customer instructions at  face value save in extreme cases when a bank is placed “on inquiry”.  The decision, in which UK Finance intervened, suggests a higher threshold for liability in respect of international payments that contrasts with the differentiated approach applied under the scheme. 

Given the multifaceted and emerging landscape, financial institutions will need to prepare for bespoke approaches for different categories of customers. In circumstances where firms cannot predict easily which regime will apply as part of a  multi-tiered and inconsistent landscape, it will be a significant challenge. 

Uncertainty

There are additionally several aspects of the new scheme that may prove inherently uncertain to implement, such as the gross negligence customer standard of caution that will apply, the extent to which PSPs can “stop the clock” in a “proportionate” manner, and the definition of vulnerable consumers.   Whilst the PSR has published some additional guidance on the customer standard of caution, there remains several questions, such as the extent to which customer warnings will be considered in assessing the culpability of a customer.   Moreover, the PSR has confirmed that they have no plans to provide any additional clarity on the meaning of “proportion” use of stop the clock provisions, which renders the risk of enforcement or prosecution for misinterpretation of this central facet of the scheme.

Due to the vagueness around these and other points, the PSR has accepted that it is likely that the Financial Ombudsman Service (FOS) will be addressing additional complaints arising from APP fraud during the forthcoming years.  The nature and structure of the FOS system creates inconsistency and the absence of guidance in future cases which is likely to cause further problems with the application of the new scheme.

Outlook

Although changes to the proposals may be unlikely, it remains important that financial institutions engage with the PSR and Pay UK during the critical time as the proposals are finalised as part of the extensive consultation process.  With recent statistics indicating that tech companies account for over 85% of all scams, the sector must additionally keep pressing the Government to undertake systemic reform to address the root cause of APP fraud.  Policy recommendations may include ensuring greater coordination amongst Government agencies and increasing oversight of tech companies.