UK payments authority Pay.UK has turned down a proposal from seven banks to levy a fee on transactions made directly from bank accounts that would have been used to reimburse victims of authorised push payment (APP) fraud.
The banks wanted the money to be used to create a central fund to finance compensation for APP fraud when neither the customer nor their payment service provider (PSP) was at fault.
Pay.UK issued a call for information to seek views on the proposal and, following feedback, said it was not introducing the fee. The authority said there was no industry consensus to make the change to its rules needed to finance the central fund.
However, it said industry participants should work together to find a solution that would give customers peace of mind and meet the needs of different types of payment providers.
In its response to the call for information (13 page / 691KB PDF), Pay.UK said the vast majority of PSPs were in support of providing compensation to customers in a ‘no-blame’ scenario.
Parties supporting the rule change said it would ensure consistent outcomes for customers and could create shared incentives to reduce fraud. Those against it said the change could impact on their business models, could introduce “unjustifiable cross-subsidies” and might even have a negative impact on incentives to reduce fraud and the cost of fraud.
Financial regulation expert Rory Copeland of Pinsent Masons, the law firm behind Out-Law, said the proposed levy was intended to mutualise risk in ‘no blame’ situations.
“The consultation responses suggest that many smaller PSPs would prefer to take all the risk where their own customers are victims of such frauds, in return for not having to subsidise frauds committed against other PSP's customers” Copeland said.
“This suggests that some PSPs believe they can protect their customers to a higher standard than the rest of the pack but want to incentivise other participants to further enhance their approach to dealing with APP fraud. The potential for a ‘race to the top’ would be beneficial for bank customers, but might cause major damage to small PSPs not signed up to the Code and whose customers do suffer a major fraud,” Copeland said.
The banks’ proposals came as the industry moves to adopt a new voluntary code against APP fraud, which was introduced in May 2019. Pay.UK said it did not feel it was right for its rules to be used to make a voluntary initiative mandatory.
It added: “It appears that requiring all parties to manage their fraud risk in the same way, regardless of their business model and systems and controls, may result in various cross-subsidies and an increase in cost for some participants and, therefore, potentially a number of undesirable competition effects on the ability of and/or incentive for PSPs to compete, enter or expand in the market.”
Pay.UK recommended that service providers should continue to have the ability to reimburse victims of APP scams, and that providers which had signed up to the code continued to commit to it.
It said it would work with industry participants to coordinate work on the possibility of developing a guarantee, similar to the Direct Debit Guarantee, which would see ‘faster payments’ participants commit to protecting scam victims.
The news comes shortly after the publication of a report by the Treasury Select Committee, which suggested banks should consider reimbursing customers who have fallen victim to APP fraud since 2016, and further said that institutions should face fines if they do not implement the 'confirmation of payee' reforms by 31 March 2020.
APP frauds occur where a victim authorises a bank transfer into an account which they believe is controlled by a legitimate payee, but actually belongs to a fraudster. The number of reported cases of APP fraud jumped 93% over the last year alone to 84,600, according to UK Finance, up from 43,900 in 2017.
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