Rethinking reimbursement: Consultation launched on APP fraud reimbursement scheme

On 4 September 2024, the UK Payment Systems Regulator (the PSR) published a consultation paper proposing a significant reduction in the maximum reimbursement limit for Authorised Push Payment (APP) fraud claims from £415,000 to £85,000.

Below, we briefly examine:

(a) the current reimbursement framework (to come into force on 7 October 2024);

(b) the PSR’s new proposals and the rationale behind them; and

(c) the potential impact of the proposed changes on financial institutions and consumers.

APP Fraud and the Reimbursement Scheme

APP fraud occurs when a customer is deceived into authorizing a payment to a fraudster. This type of fraud remains a persistent and growing threat, with almost £500m lost to APP fraud in 2023. Unlike unauthorized transactions—where banks would typically reimburse victims—APP fraud historically placed a heavy burden on consumers, sometimes resulting in substantial, irrecoverable losses.

The introduction of the Contingent Reimbursement Model Code (the Code) in 2019 sought to improve protections for consumers. The Code offered a framework for payment service providers (PSPs) to reimburse victims under certain conditions, such as demonstrating that the customer exercised reasonable care. However, the Code is voluntary and there has been variability in how it has been enforced across different financial institutions.

The Financial Services and Markets Act 2023 mandated further reforms in order to remedy these shortcomings. This included making reimbursement for certain types of consumer APP fraud a legal requirement by way of the APP fraud reimbursement scheme (the Scheme), overseen by the PSR. Under the Scheme, reimbursement costs would be split between the “sending” and “receiving” PSP. As noted above, the Scheme is due to come into effect on 7 October 2024.

The maximum reimbursement limit under the Scheme was initially set at £415,000, reflecting the Financial Ombudsman Service's previous maximum limit for such claims.

The PSR has now acknowledged concerns expressed by PSPs – particularly smaller PSPs – about the impact of the limit on their solvency position, prudential risk, firms’ ability to maintain their capital requirements, the cost of capital and availability of investment and the competitiveness of UK firms.

The PSR's Consultation Proposals

The PSR is now consulting on reducing the Scheme’s limit to £85,000. The new cap aligns with the Financial Services Compensation Scheme (FSCS) reimbursement limit and, according to the PSR, aims to protect consumers while ensuring that the Scheme is sustainable. It is intended that the lower limit comes into effect on the commencement of the Scheme.

Rationale behind the proposed change

The proposed reduction in the reimbursement limit is driven by several key factors:

• Prudential Concerns: The PSR notes that high-value APP frauds of over £415,000 represent less than 0.1% of APP frauds by volume. By lowering the reimbursement limit to £85,000, the PSR aims to mitigate the financial burden on PSPs while ensuring the vast majority of fraud cases remain covered. It seeks to create a more sustainable reimbursement model that prevents financial strain on smaller institutions and maintains overall market stability.
• Consistency: The proposed reduction aligns the reimbursement limit with the FSCS threshold, aimed at ensuring consistency and predictability in consumer redress mechanisms. While the lower limit may prompt consumers to exercise greater caution in authorizing payments, it also aims to provide adequate protection for the vast majority of fraud cases, which typically involve lower-value transactions.
• Consumer behaviour and responsibility: The PSR also hopes that a lower reimbursement limit will encourage consumers to exercise greater vigilance and caution when authorizing payments, reducing the incidence of fraud.

Potential impacts of the proposed changes

The proposed changes may have significant effects on:

(a) Consumers: although the new limit is intended to continue to offer cover for the majority of APP fraud cases by volume, victims of high-value scams may face substantial financial losses without full reimbursement. This may lead to considerable uncertainty for consumers, especially those making large transactions (e.g. for property purchases). We note however that the PSR considers that the new limit will only affect around 30 claims per month. Nonetheless, the potential for heightened losses is likely to prompt calls for additional consumer education and fraud prevention measures.

(b) Payment service providers:

1. Reduced potential liability: PSPs will likely welcome the reduced financial liability associated with a lower reimbursement limit. It is critical to note however that the limit only applies to single claims (i.e., claims in relation to one particular payment). It is common for APP fraud to involve multiple payments over a period of time, and it will be open to consumers to make a claim in respect of each fraudulent payment.
2. Reputational risks: PSPs will need to remain vigilant in their fraud detection efforts and transparent with customers about the limitations of the new framework. Reputational risks could arise if consumers perceive the reduced cap as a diminishment of their protection.
3. Regulatory monitoring: PSPs must be prepared to adapt to the evolving regulatory landscape, ensuring compliance with new requirements while managing operational risks effectively. The PSR has confirmed that it will review the Scheme, specifically including the limit, after it has been in place for 12 months. It is possible that the PSR may propose further changes to the limit at that stage.

Conclusion

The PSR’s proposal to lower the APP fraud reimbursement limit from £415,000 to £85,000 reflects the regulator’s aim to balance consumer protection with financial sustainability for PSPs. The consultation process – which is open until 1.00pm on 18 September 2024 – offers a valuable opportunity for stakeholders to provide feedback to the PSR.

As the reimbursement scheme moves toward its implementation date on 7 October 2024, it will be crucial for PSPs to prepare for the coming changes. The policy, and the cap, will be reviewed again next year, and PSPs should ensure that they continue to engage with any developments.