Debate Over UK Fraud Refund Rules Heats Up

Regulators in the U.K. are preparing to mandate that banks reimburse victims of APP fraud.

Leading the charge, the Payment Systems Regulator (PSR) has drawn up proposals for a new framework that will require banks and other payment service providers to reimburse victims of authorized push payment (APP) fraud. Yet despite stating that it had “broad support” for its plans, policymakers disagree on how best to implement and regulate scam reimbursements.

In a back-and-forth dialogue between the Treasury Select Committee (TSC) and the PSR, the TSC this month published a report criticizing the PSR’s plans, to which the regulator provided a response.

Calling the proposed framework “fundamentally flawed,” the TSC objects to the way the PSR intends to delegate responsibility for the refund process to Pay.UK — an industry body that operates the U.K.’s interbank payment rails and is funded by the country’s financial services sector.

The TSC report says the role of Pay.UK in the reimbursement process is “an inherent conflict of interest, as Pay.UK will be responsible for ensuring the very banks and building societies that are its own guarantors — some of which are fundamentally opposed to the plans — pay out large sums to reimburse consumers.”

Pointing out that the reimbursement program has already been “unacceptably delayed,” the report goes on to warn that the continued role of Pay.UK creates an opportunity for the banking industry to further delay its implementation.

“Putting an industry body in charge of reimbursing scam victims is like asking a fox to guard the henhouse,” Treasury Committee Chair Harriett Baldwin said in the report. “The regulator needs to take back control of the reimbursement process, rather than leave it in the hands of an industry body which is inherently conflicted.”

PSR Defends Pay.UK Role

In its response to the TSC, the PSR said that its report includes “a misinterpretation of our proposal on how our powers can be used to require [scam reimbursement].”

The regulator argues that the most effective way to make sure victims of APP scams are reimbursed is by using its powers to require changes to Pay.UK’s rules. Because any financial institution that wants to participate in national payment systems is bound by these rules, the PSR makes the case that amending them is the best way to implement the proposed reimbursement scheme.

In parallel with efforts to introduce a reimbursement framework, the PSR also wants to enforce greater transparency into how banks are responding to the threat of APP fraud by publishing data on the number value, and reimbursement rates of scams.

In a consultation paper published earlier this month, the regulator said that it will require certain payment service providers (PSPs) to publish comparative performance data on their handling of APP scams starting in March 2023.

Initially, three metrics will be reported. These include the proportion of APP scammed customers who are left out of pocket, the sending PSPs’ scam rates, and the receiving PSPs’ scam rates, not including instances in which the victim’s money is returned.

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