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Out-Law News 3 min. read

‘Confirmation of payee’ proposals welcome but ‘not without risks’

Approximately 400 payment service providers (PSPs) operating in the UK may be mandated to apply ‘confirmation of payee’ protocols when processing customer transactions in a move designed to curb fraud.

The Payment Systems Regulator (PSR) is consulting (CP22/2) on giving a specific direction to these PSPs for a staged implementation of CoP after it said consumers needed more protection against so-called authorised push payment (APP) scams.

APP scams occur when a victim authorises a bank transfer into an account which they believe is controlled by a legitimate payee, but actually belongs to a fraudster. Figures published by the UK Treasury show that APP fraud has been on the rise in recent years.

Payments expert Andrew Barber of Pinsent Masons said: “This consultation is a welcome development in the industry given that, as the PSR itself notes, voluntary uptake of CoP has not spread widely enough, and will undoubtedly bring enhanced protection against APP scams and misdirected payments.”

“This is also a great opportunity for innovation and competition in the industry when it comes to CoP solutions provided by third-party vendors and indirect access providers or developed by PSPs themselves. However, the proposals are not without risks,” he said.

Confirmation of payee (CoP) protocols were established in 2018 by Pay.UK, the body tasked with designing and implementing new payments architecture in the UK. In 2019, the PSR directed the UK’s six largest banking groups to send and respond to CoP requests, which essentially involves checking the name on the account of the person or organisation to be paid and either confirm the details are correct, asking the payee to check the details are correct if the name provided is similar, or advising the customer that the details are wrong.

Though a number of other PSPs have subsequently voluntarily adopted the CoP standards, the PSR said there is now a case to go further and direct other PSPs to provide the CoP service. Its plans would “achieve near ubiquity of service”, it said.

“We think more needs to be done to protect consumers,” the PSR said in opening a consultation on its proposals. “Because of the benefits of CoP, and because there are PSPs that undertake a sizeable volume of transactions involving end customers, we are concerned that there are still many consumers who are not protected from APP scams and misdirected payments. In addition, we have continued to see a rise in fraud being received by PSPs who do not offer CoP, and despite this, PSPs have been slow to implement CoP.”

Mila Pencheva, also of Pinsent Masons, said: “Weighed against enhanced customer benefits should always be the costs to PSPs, the impact on new entrants to the market always being greater. The proposed staged implementation of the direction would go some way towards easing the burden on smaller PSPs. However, in its cost-benefit analysis, the PSR flags that it has not collected detailed cost data at this stage so it is imperative on PSPs affected by this consultation to assess how this will affect them and feed this back to the PSR. Care needs to be taken to ensure the proposals do not pose undue burden on new entrants and hinder competition in the industry more generally.”

The PSR plans to apply fresh CoP directions in two phases. The first phase would apply to nearly 50 PSPs and require them to operate the CoP service by 30 June 2023. This would increase CoP coverage from 92% of transactions made via Faster Payments to 99%.The second phase would apply to more than 350 smaller PSPs who either use unique sort codes, or that are building societies using a ‘Secondary Reference Data’ reference type. The deadline for their compliance would be 30 June 2024, according to the proposals.

Mila Pencheva said: “The proposed implementation timescales seem to an extent to be premised on an expectation that the industry and Pay.UK will work together and understand how processes can be streamlined to ensure PSPs can implement CoP at a more rapid pace. The PSR estimates that it currently takes between nine to 12 months for a group of around 40 to 50 PSPs to deliver CoP and it has found that current processes are not as fast and effortless to onboard as originally envisaged. Unless there is active innovation in the industry, the current proposed implementation timescales may not be feasible.”

The PSR’s consultation on its proposals is open until 8 July 2022.

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