UK launches world-first bank transfer fraud refund scheme

The UK has launched a world-first bank transfer fraud refund scheme after more than two years in the works and last-minute changes influenced by industry lobbying and pressure from ministers.

From Monday, the Payment Systems Regulator (PSR) is requiring more than 1,500 banks, fintechs and other payment firms to reimburse victims of authorised push payment (APP) fraud up to a limit of £85,000 per claim.

Costs must be split between the companies used to send and receive the payment, with most refunds having to be settled within five working days. To refuse a claim, firms must prove the customer acted with “gross negligence”.

The rules only apply to transfers made to and from UK accounts and do not cover payments from before the 7 October implementation date.

The system allows payment firms to apply a £100 excess when settling fraud claims. This means that claims under £100 – representing nearly a third of APP scam cases last year – are not eligible for any reimbursement should the firm choose to charge the excess.

Not all firms intend to charge victims, and they must contact customers to lay out their position. Charges cannot be passed on to vulnerable customers.

The PSR has argued its measures are intended to minimise financial harm to consumers while ensuring they remain cautious of potential scams.

“Our new requirements will see all payment firms involved facing strong incentives to introduce more robust ways of identifying and preventing these scams from happening in the first place,” David Geale, the PSR’s managing director, said on Monday.

“Firms have already made a good start in making changes, and we expect to continue seeing new and innovative systems being rolled out to drive fraud out of our payment systems.”

The UK has become the only country to introduce this kind of mandatory reimbursement regime, which coincides with other measures designed to crack down on booming levels of online fraud.

The Treasury said last week that it would give banks more time to delay and investigate payments where there are reasonable grounds to suspect fraud.

Lenders will have up to four working days to either complete or refuse a payment, up from the current window of one working day.

Worries remain

The PSR confirmed on 25 September, less than two weeks before implementation, that it would lower the scheme’s refund cap to £85,000 from £415,000 after intense lobbying from the fintech sector and the Treasury raising concerns.

The regulator found in a review of high-value scams that of more than 250,000 cases, there were 18 instances of people being scammed for more than £415,000 in 2023, and 411 instances of more than £85,000.

But firms have continued to sound the alarm over the rules’ potential negative impacts for both the payments industry and consumers.

Fintech executives have warned that by sticking to its October implementation date, the PSR will leave many firms unprepared to handle refund claims. In June, trade body The Payments Association, which has more than 200 members, called for the rules to be delayed by a year.

The sector has also cautioned that firms are still at risk of heavy losses from multiple claims submitted by organised fraudsters. Trade body The Payments Association called for a £30,000 cap, which it claims would cover more than 95 per cent of cases.

Industry groups have further argued that the rules place no liability on technology firms for the roughly three-quarters of fraud that originates online.

The PSR’s U-turn last month angered consumer groups. Rocio Concha, director of policy and advocacy at Which?, said the regulator had “shamefully sidelined scam victims” and that lowering the cap “reduces the incentive for banks and payment firms to take fraud seriously”.

“We expect the regulator to closely monitor the protections that individual payment providers put in place to stop scams and be prepared to intervene and increase the threshold,” she added.

Financial trade bodies and consumer groups have both warned that sophisticated criminal syndicates could try to use the rules for new scams, either pretending to be banks offering refunds or claiming reimbursement money under false pretences.

The PSR has pledged to review its scheme 12 months after implementation.

While banks may voluntarily reimburse claims worth more than £85,000, victims that have been denied a refund can lodge a complaint with the Financial Ombudsman Service, which has a £430,000 compensation limit.

How did we get here?

Before the regulator made it mandatory, there were efforts to push up reimbursement rates among banks.

Many of Britain’s largest banks had signed up to a Contingent Reimbursement Model Code, introduced in 2019 and overseen by self-regulatory body the Lending Standards Board.

Banks within that scheme, which is being retired from Monday, refunded 73 per cent of customers’ APP fraud losses in 2023, up from 23 per cent in 2018.

TSB Bank launched its own fraud refund guarantee scheme five years ago that has seen it reimburse 97 per cent of APP scam victims. A person familiar with the matter said TSB had lobbied for all banks to implement a similar regime.

After announcing an intention to legislate in May 2022, the government gave the PSR beefed-up powers through the Financial Services and Markets Act last June to introduce its new regime.

According to banking trade body UK Finance, the total number of APP fraud cases jumped by 12 per cent annually last year to 232,429.

Reported losses to this type of scam totalled £459.7m. However, some experts believe the true figure is likely closer to £700m as around a third of scams are estimated to go unreported.

APP scams involve tricking victims into transferring money from their bank account to a fraudster posing as a genuine payee. Purchase scams made up around two-thirds of APP fraud cases in 2023.