The UK Government has published a draft legislation to extend payment service providers’ (PSPs) time to analyse potential fraudulent transactions, by 72 hours on top of the current business day they already have. We reached out to the industry to uncover if the move will be as useful as intended or if it will only delay legitimate transactions and negatively impact consumer experiences.
According to the finance ministry, Brits lost over £485million in 2022 due to authorised push-payment (APP) fraud; this occurs when a fraudster tricks a victim into transferring them money. The proposed new legislation will give financial institutions extra time (three additional days) to evaluate if a consumer is being taken advantage of or if it is a legitimate transaction.
Mandatory changes to reimbursement
Currently, if a consumer falls victim to this sort of fraud, there is no requirement by a bank to reimburse the consumer’s loss and while many do, it’s very dependent on the bank. However, the Payments System Regulator, one of the payments regulators in the UK, has issued that from 7 October 2024, banks and other payment firms must reimburse consumers hit by APP fraud.
The most consumers can get back from a scam is £415,000, with users potentially having to pay up to £100 before making the claim. This limit matches the Financial Ombudsmen Service’s (FOS) when dealing with its complaints.
The ministry’s new legislation will look to launch on the same day as the Payments System Regulator’s reimbursement legislation.
More time is needed
With reimbursement becoming mandatory, it comes as no surprise that firms need more time to determine if a transaction is fraudulent or not. However, this added time could slow down consumer transactions. Kate Troup, a financial services regulatory lawyer at law firm Fladgate, explains how the ‘golden era’ of instant payments is over. Rhey will now likely slow down so financial firms can make the right decisions on legitimate or illegitimate transactions.
“Once payment firms are required to reimburse all victims of authorised push payment fraud then it is likely that we are going to see more friction in the online payment system – slowing down transactions to enable payment firms to investigation suspicious transactions.
“At the moment, there are a number of cases where customers quite quickly realise that they have been the victims of fraud but by the time their bank or payment firm contacts the receiving firm the payment has disappeared and cannot be recovered. When the new rules come into force and the receiving firm is required to make a mandatory reimbursement to victims of fraud it is likely that some firms will impose a delay between a one-off unexpected payment into an account and a subsequent payment out.”
Liability lies with banks, not consumers
According to Silvija Krupena, director of the financial intelligence unit at RedCompass Labs, a payment and financial crime service provider, there has been a shift in responsibility when it comes to fraud. While previously the onus was on consumers to be aware of who they were transacting with, Krupena says things have now changed and banks are expected to step up.
“When it comes to fraud, liability is shifting from consumers onto banks who are increasingly being expected to refund their customers when fraud takes place. Banks have already made huge investments into fraud prevention adopting tools such as confirmation of payee which helped them stop £650.7million worth of fraud in the first half of 2023, a 10 per cent increase from the latter half of 2022.”
Krupena looks towards technology as a means of saving financial firms from needing to make enormous payouts. “Banks need to explore new technologies such as AI and data-driven, persona-based approaches, otherwise, they could be on the hook for hundreds of millions in fraud losses.”
A similar view was shared by James Gliddon, partner at national law firm, Foot Anstey, as he noted the importance of tech in ensuring consumers are not paying the price with long transaction times. “Given the volume of payment instructions, it is very unlikely that there could be a manual or human interaction – which is sometimes the only thing that can disrupt the fraud in action. We can expect the increased adoption of tech/AI tools to analyse and optimise any interventions.”
Banks must actively look to prevent fraud
Emma Lovell, chief executive of the Lending Standards Board, the body, explains how consumers must be protected by banks through active fraud prevention, rather than letting consumers fall victim and then helping them.
“Our experience of overseeing the only existing framework for APP fraud prevention, detection, and reimbursement – the Contingent Reimbursement Model Code – has demonstrated the importance of taking a consistent, sector-wide approach to tackling fraud.
“The incoming Payment Systems Regulator framework introduces mandatory reimbursement for APP fraud victims from all PSPs, but it is important that prevention and detection don’t get left behind. You can stop consumer harm from APP fraud by stopping these scams in the first place.
“The legislation proposed today is positive, and can be part of a bigger picture approach on prevention and detection. A new APP Fraud Prevention Standard is needed to ensure the industry has a consistent approach to stopping scams.”
Yes banks have a role to play but consumers must help themselves
Although banks have a large duty to play in protecting consumers with fraud prevention tools, it is crucial that consumers learn how to spot potential fraud themselves. Will Christopher, civil fraud partner at law firm Kingsley Napley, explains how the new legislation “doesn’t take away from the need to continue to educate the public about the sophisticated tactics that scammers employ.
“Common APP frauds include romance frauds through to frauds where the scammers operate seemingly plausible investment websites, especially in the crypto space. Scammers may even pose as the banks themselves to dupe their victims.
“We are frequently contacted by people who have lost sizeable sums to APP. Where losses exceed £415,000 there are steps that can be taken via freezing injunctions and search orders to recover funds but this is by no means a failsafe route.
“Whilst today’s proposals are to be welcomed, therefore, it is still the case that prevention is better than cure and the public must remain vigilant. Regardless of the measures in place, scammers will continue to evolve and adjust their strategies to game the system.”
Francis Bignell
