UK payment firms warn new fraud refund rules could ‘freeze’ systems in October

The UK’s payments watchdog is under growing pressure from the firms it regulates to rethink fraud refund rules that industry chiefs say could wreak havoc for both companies and consumers.

New measures from the Payment Systems Regulator (PSR) are edging closer to implementation, forcing banks and other payment firms to refund victims of authorised push payment (APP) fraud up to a limit of £415,000 from 7 October.

The cost would be split between the companies used to send and receive the payment, with the sending firm required to notify the receiving firm of the scam within a specified period.

The proposals come under new powers given to the PSR under the government’s Financial Services and Markets Act, which came into force last June.

APP fraud refers to when criminals trick victims into making a payment through techniques like purchase, investment and romance scams.

Britons lost roughly £459.7m to APP fraud last year, according to banking trade body UK Finance. However, some experts believe the true figure is likely closer to £700m as around a third of scams are estimated to go unreported.

City A.M. understands dozens of payment firms are now lobbying for the PSR to delay or scale back its proposals, warning that very few are ready to implement them.

Industry revolt

Earlier this month, trade body The Payments Association wrote to the PSR calling for it to delay the measures by a year to “ensure the right policies, technology and systems are in place”.

One concern is that the claim management system that would allow sending firms to notify receiving firms, provided by Pay.UK, is not expected to be ready until May 2025.

As a result, one senior industry figure said firms faced having to report claims in a manual way that would be slow, costly and leave room for errors.

“There is literally a chance that people don’t get money or can’t pay for services or things that they want to in a timely manner because of firms having to deal with this – big and small,” they added.

A PSR spokesperson said firms could choose to use “existing industry systems” and that Pay.UK would offer “the best solution longer term”.

The Payments Association, which has more than 200 members, is also lobbying for a lower refund limit of £30,000. A person familiar with the matter said lowering the limit is the group’s main goal.

Fintech trade body Innovate Finance is calling for the limit to be revised to £85,000, which it said would cover 99.7 per cent of cases.

“The £415,000 limit will be detrimental to fintechs and challengers trying to provide a competitive landscape to have a better outcome for the end consumer,” said chief executive Janine Hirt.

“You could end up with a situation in October where this implementation could threaten to freeze our payment systems, which are critical UK infrastructure. The potential impact of implementing this incorrectly is sky-high.”

She added that the £415,000 limit could also “significantly affect” fintech investment in the UK, which would become the only country with such rules.

Chris Hemsley led the PSR through the formulation of its refund rules before stepping down at the end of last month.

The PSR said it was “monitoring the incidence and impact of high-value APP fraud” but had seen “no evidence” suggesting it should currently consider a lower limit. The £415,000 cap is in line with the award limit for complaints referred to the Financial Ombudsman Service.

UK Finance has also criticised the measures, arguing they could unleash more “complicit fraud” by incentivising scammers to pretend to be victims for reimbursement money.

“Cases of fraud will increase,” one industry boss said. “Fraudsters will target this country more because of industry unreadiness and guaranteed reimbursement.” To refuse reimbursement, firms would have to prove the customer acted with “gross negligence”, which the PSR itself has called a “very high bar”.

The PSR’s new interim head David Geale has rejected calls to delay the rules, saying it had engaged and consulted with the industry for more than two years.

However, multiple senior industry figures said the PSR’s engagement and response time was inadequate and that it had failed to clarify all the questions businesses have. “For years we’ve told them no – everyone told them no. We didn’t even respond to the last consultation,” one said.

The PSR said it has held regular engagement sessions and would “continue to support industry and take into account all feedback in the lead up to implementation”.

The Financial Conduct Authority parachuted Geale in to lead the PSR after former managing director Chris Hemsley suddenly stepped down at the end of last month.

The PSR said Hemsley’s departure had “nothing at all to do” with backlash to the rules. He is due to join regulatory advisory firm Fingleton as a director in the autumn.

Fintechs could ‘withdraw’

Executives argue the measures threaten firms’ business models and profitability, particularly fintechs with less capital to cover mandatory reimbursement.

Oliver Prill, chief executive of SME banking fintech Tide, warned that as payments is a “very low margin business”, firms would need to pass the higher costs on to customers. “Some players may not find this possible and withdraw from the market or particular customer segments,” he said. 

Tide has calculated APP fraud has the potential to climb as high as £1.5bn per year under the reimbursement regime, meaning payment firms could be forced to pass on an average of up to £53 to each UK household.

Prill called for more clarity on the PSR’s impact assessment and for it to consider phasing in the rules “with a clear ‘kill switch’ if fraud were to spiral out of control”.

Virraj Jatania, CEO of Pockit, a fintech focused on the financially underserved, said he had been “sounding the alarm” since late last year.

“A system that almost guarantees reimbursement to fraud victims inadvertently lowers the perceived risk for scammers,” he added. “And without a fair system to determine fault between the sending and receiving banks, the firms working hardest to combat fraud are being unfairly penalised.”

Criticism has also come from the Treasury, which the PSR reports to. After meeting with industry figures earlier in the month, City minister Bim Afolami said in May that the rules had “significant problems”.

“One of the reasons that the current government got so uptight about it was realising it could blow up right at election time,” an industry figure with knowledge of the matter said.

“It’s an open secret within Treasury circles that the PSR’s proposals are untenable, but that changing course is seen as too embarrassing,” another source said. The Treasury declined to comment on its stance, citing communication restrictions in the pre-election period.

Labour, which polls widely forecast to win the general election on 4 July, did not respond to a request for comment on whether it supported the rules.

Payment firms have further argued the measures do not place liability on Big Tech for its role in fraud origination. UK Finance data shows around 76 per cent of APP fraud started online last year.

Jatania said that by sharing none of the reimbursement burden, social media giants were “getting away scot-free”. The Payments Association said delaying the rules would give regulators more time to involve tech companies in the plans.

Crunch time

The PSR is standing firm that the rules will be implemented on 7 October. “APP fraud continues to be a problem and last year victims lost around £450m,” its spokesperson said. “We therefore need to act quickly to make sure people are much better protected.”

They added: “We remain confident that this is the right approach, going further than ever before to safeguard consumers.

“Our standard of caution, which sets out the few exceptions to reimbursement, aims to strike the right balance between encouraging people to be careful and genuine, while making sure there are high levels of protection.”

Groups like Which? have backed the rules, as well as TSB Bank. The lender launched its own fraud refund guarantee scheme five years ago that has seen it reimburse 97 per cent of APP scam victims. A person familiar with the matter said TSB was lobbying for all banks to implement a similar regime.

“Fraud is the UK’s biggest crime, and with over a million pounds lost every day to bank transfer scams, these new rules must be delivered to October’s deadline,” said Nicola Bannister, TSB’s customer support director.