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'Confirmation of payee' reforms face delay

The implementation of new anti-fraud measures to protect UK banking customers faces delay due to a backlog of changes being worked on by banks and the complexities involved in delivering the new measures, payments industry figures have told MPs.

The Payment Systems Regulator (PSR) set out proposals last autumn to require a new 'confirmation of payee' system to be fully implemented by 1 July this year. The move would oblige banks to set up a system whereby it and its customers could check that the name of an account to which funds are to be sent is correct before proceeding with the transaction. It is envisaged that the change will help reduce authorised push payment (APP) fraud and accidentally misdirected payments.

APP frauds take place where a victim is conned into authorising a transfer of money from their bank account into an account which they believe is controlled by a legitimate payee, but is actually controlled by a fraudster.

However, Stephen Jones, chief executive of the trade body UK Finance, told the Treasury Select Committee on Wednesday that he expects it will be some time in 2020 before the new system will be operational.

"It is quite a complex IT and process change," Jones said. "We are working hand in glove with [the PSR] on a timetable to ensure to that that is put in place across the industry and I expect that that will be capable of being rolled out across the vast majority of payment services providers some time next year."

Jones said implementing the confirmation of payee system represents "a big change at a time of a lot of change" which banks are "required to implement", but insisted the project has not been "deprioritised".

Susan Allen, head of retail business banking at Santander UK, said that in addition to the confirmation of payee initiative, payment institutions are in the process of updating their systems to account for a variety of other regulatory-driven reforms, including making changes to comply with the EU's second Payment Services Directive (PSD2), the UK's open banking regime and to address remedies imposed by the Competition and Markets Authority (CMA) following its high cost of credit review.

"All of these changes touch the payment systems so we have to look at sequencing them very carefully so at the same time we don't create an operational risk to the payment systems," Allen said. "We have a finite pool of people in the UK who really understand and can work on those systems and we are having to sequence those changes."

She said that implementing the changes required under the confirmation of payee initiative is "a bit more complex than it sounds". Payment institutions have to make changes across all their customer channels, including online and mobile services, ensure that changes "link into the payment systems", and make further system alterations "to be able to receive messages in from the other banks and then present them back to the customers in whatever channel the customer chooses", Allen said.

Technical standards for the 'confirmation of payee' service were published by Pay.UK, the body tasked with designing and implementing new payments architecture in the UK, in October last year. At the time Pay.UK said the service would kick-in when businesses or consumers are setting up a new payment, or amending an existing one.

Under those standards, payment service providers (PSPs) will check the name on the account of the person or organisation to be paid and either confirm the details are correct, ask the payee to check the details are correct if the name provided is similar, or advise the customer that the details are wrong.

The PSR subsequently opened a consultation in November on whether regulatory intervention is needed to require PSPs to implement the confirmation of payee reforms. The consultation closed on 4 January this year.

In a statement, the PSR said it is "still working through the responses" received to its consultation "so no decisions on timing have been made". It said it wants the confirmation of payee reforms "brought in as soon as possible" but to also ensure "that when it is introduced, it is an effective way to stop this crime taking place"

In its evidence session on economic crime on Wednesday the Treasury Select Committee heard about how competition issues could influence when a deadline for implementing confirmation of payee systems is set for.

Stephen Jones of UK Finance said: "Whilst large and sophisticated institutions have got the resource to do what is required internally a number of the middle and smaller payments institutions do rely on third parties to deliver a solution to implement and actually what we are trying to do is encourage those third parties to come forward to deliver competitive solutions which can then be implemented by smaller PSPs."

"That's another factor which we have to take into account in recommending a timetable for the whole system because if we go too fast we will end up with a two-tier system where only the big institutions are able to offer 'confirmation of payee' and then customers are forced to make a choice between mid-sized and smaller institutions who we want to encourage for competitive reasons but who haven't got the resource to do it as fast as the big institutions so there is quite a tension there in terms of execution," he said.

Chris Rhodes, chief product and propositions officer at Nationwide Building Society, said: "There has got to be a critical mass of institutions able to test and then implement at the same time."

According to UK Finance figures, £145m of losses suffered by UK bank customers in the first six months of 2018 were attributable to APP scams. The trade body previously said there were almost 44,000 reported cases of APP frauds in 2017 spawning losses totalling £236 million to businesses and consumers.

Banking and payments law expert Henry Burkitt of Pinsent Masons, the law firm behind Out-Law.com, said: "We understand that a number of the banks have been struggling to keep pace with the exponential rate of change of payments infrastructure, for example in consolidation of the retail payment schemes into Pay.UK, implementation of open banking, structural reorganisation requirements as a result of Brexit, PSD2 and structural reform, and that 'confirmation of payee' timing has slipped as a result."

"We look forward to the outcome of the PSR's consultation and clarity on the timing of implementation," he said.

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