The fight for the UK’s fraud compensation scheme

Some in the Treasury are calling the scheme “a disaster waiting to happen”. But for consumer advocates, it offers “vital protections for victims of fraud”.

A new regime, forcing banks and payment companies to reimburse victims of fraud up to £415,000, is due to start on 7 October. The city, which fears the plan could force smaller firms out of business, is lobbying hard to delay or weaken the measures.

The scheme is now a flashpoint between ministers, who are bound to respect the independence of the City’s watchdog, and the Payments Regulator, which is determined to press ahead with the plan.

Why are banks required to pay compensation?

In 2023, Britons lost £459.7m to authorized push payment (APP) fraud, where someone is tricked into sending money to a fraudster posing as the genuine beneficiary of their bank account.

The money is usually sent to accounts the fraudsters hold at other banks in the UK. APP fraud includes purchase scams, online investment schemes and criminals tricking victims into sending them money by posing as a contact.

Three-quarters of APP fraud cases came from online sources and a further 16% from telecoms, according to the latest fraud report by banking lobby group UK Finance.

Banks and payment companies currently voluntarily reimburse customers for fraud at widely varying rates, with some reimbursing almost 100% of cases and others less than 10%.

The previous Conservative government in 2023 passed the Financial Services and Markets Act, which instructed the Payment Systems Regulator to prepare proposals for a consistent fraud refund regime.

Banks and payment service providers, including building societies, digital payments firms, remittance services and credit card issuers will be covered by the new regime.

PSR originally planned to implement the regime in April, before delaying it to give the industry more time to prepare.

Why are banks questioning the regime?

The City argued that the £415,000 cap on compensation was too high and would encourage fraud rather than help tackle the problem.

Fraudsters may enter into fake online transactions with an accomplice, who would demand the maximum compensation from a bank and then split the proceeds, they claim.

UK Finance also recently warned Labor Minister Tulip Siddiq that the claims management system needed to implement the new regime may not be ready by October 7, according to people briefed on the matter. .

The system, which will be run by Pay.UK, which operates interbank payment systems, is needed to assess claims and properly divide liability between the sending and receiving firms.

The implementation of the regime in October is likely to lead to “confusion and disputes” over what counts as APP fraud and who should be required to reimburse consumers, according to UK Finance.

Rocio Concha from the consumer group Which? said fraud victims were already “at the mercy of an unfair and inconsistent refund lottery more than necessary.”

She added: “The government’s aim to boost economic growth is laudable, but growth built on the backs of victims of fraud and financial crime is not the answer.”

What did the regulator say?

The PSR strongly defended its plan and stressed that the measures had been the subject of lengthy consultations.

“Competition and consumer and business protection go hand in hand,” it says. “We believe it is important that the UK has a vibrant payments landscape; one where innovation thrives.”

“But it is equally important that all users are protected and that all payment firms operating in the UK take the right steps to prevent fraud in the first place,” he added.

Should tech companies shoulder some of the burden?

There is an agreement between the parties that technology companies that provide platforms for online sales should share some of the burden for reimbursing victims of fraud.

In June, Labor criticized “big tech companies” who “contribute very little” to tackling online fraud or compensating victims, as it drew up plans to make them share the cost burden with banks.

Former Tory City minister Bim Afolami agreed that tech firms needed to do more. He said: “I have long been of the view that there needs to be a much fairer sharing of burdens between banks and technology companies.”

However, the previous Conservative government explored the idea of ​​extending the refund to tech companies and concluded that it would not be proportionate or effective.

Labor currently has no legislation to force tech companies to contribute to compensation and did not include such plans in its first King’s Speech.

Antony Walker, deputy CEO of industry body techUK, said technology companies are “acutely aware of the impact of fraud and continue to put many sophisticated measures in place to detect and combat online fraud every day”.

What will the new Labor government do?

City minister Siddiq is worried about the tight Oct. 7 deadline, and Treasury officials are talking to PSR to see if the systems will be ready, according to people familiar with the matter.

She also wants to see a review of the impact of the rules six months after they are implemented, the people said. The PSR said it would closely monitor the new regime in any case.

Labor has made boosting economic growth one of its five “missions” in government and has continued a Tory program to push independent regulators to do more to encourage growth.

The question is how far the government will go to pressure independent regulators in pursuit of this goal.