New APP Fraud Reimbursement Rules: Key Last-Minute Changes

As the digital landscape evolves, so do the risks, particularly through authorised push payment (APP) fraud. In response to these growing threats, new regulations aimed at enhancing consumer protection are now in force. 

These rules, which came into force on 7 October 2024, represent a significant shift in how APP fraud compensation is handled. However, just before their implementation, the Payment Systems Regulator (PSR) made some last-minute changes, which impact businesses and individuals alike. This article provides an overview of the APP fraud reimbursement rules, the adjustments made to compensation limits, and a key update allowing banks to delay payments in suspected fraud cases.

What is Authorised Push Payment (APP) Fraud?

An authorised push payment fraud occurs when a fraudster manipulates or deceives an individual into transferring funds to an account that is not under their control. There are two main types:

• Malicious payee: tricking someone into purchasing goods or services that don’t exist or are never received.
• Malicious redirection: fraudster impersonates someone to trick the victim into transferring funds into the fraudster’s account.

With the increase in these types of fraud, the UK regulator has implemented new rules to ensure victims of APP fraud are reimbursed swiftly and fairly.

New APP Reimbursement Scheme Rules

The new reimbursement scheme introduced by the PSR is designed to offer victims of APP fraud greater protection. All payment service providers (PSPs) are now required to act consistently when handling cases of APP fraud that occur via the Faster Payment System.

Under the new rules, PSPs are obligated to reimburse victims within five days of the fraud being reported, ensuring quicker resolutions for affected customers. However, the implementation of these regulations has not been without controversy, particularly concerning the compensation limits.

Maximum Reimbursement Limit Change

One of the most significant last-minute changes made by the PSR was the reduction of the maximum compensation limit for APP fraud victims, from the initially proposed £415,000 to £85,000. This adjustment aligns the limit with the Financial Services Compensation Scheme (FSCS), which covers individual depositors in the event of banking insolvency.

The change came after concerns were raised about the financial impact of a £415,000 limit on smaller firms. Following a review of historical APP fraud cases, the PSR concluded that a lower limit would have minimal impact, as the vast majority (97.2%) of APP claims fall below £85,000*. Only 0.28% of cases exceeded this limit, meaning the reduction will affect a small number of high-value claims.

The Impact on High-Value Fraud Claims

For those rare instances where claims exceed £85,000, victims may still seek further recourse through the Financial Ombudsman Service (FOS). If the FOS rules in favour of the victim, the sending bank will be liable for any reimbursement above the £85,000 cap, rather than sharing the responsibility 50:50 with the receiving bank under PSR guidelines. 

The mandatory reimbursement is intended to incentivise banks to implement stronger fraud prevention measures. However, some industry observers argue that lowering the compensation limit may discourage innovation in fraud prevention, as it shifts the burden of reimbursement back onto the sending bank. Rather than incentivising the receiving bank to do more, it discourages a more collaborative approach between sending and receiving institutions.

Banks Given More Time to Prevent Fraud

One notable change in the landscape is a provision allowing banks to delay payments by up to four days when fraud is suspected. This move, introduced by HM Treasury, grants payment service providers additional time to investigate suspicious transactions. The aim is to prevent fraud before it happens, giving banks the chance to contact customers and offer advice before any potential loss. This delay could serve as a critical window, giving PSPs the opportunity to help protect customers from falling victim to fraud, particularly in a digital environment where speed and convenience often come at the expense of security.

Taking Steps to Safeguard Against APP Fraud

The introduction of the new APP fraud reimbursement rules marks a significant step in protecting consumers and holding payment service providers accountable for fraudulent transactions. While the reduction in the compensation limit may affect a small number of high-value claims, the vast majority of consumers can expect their fraud claims to be reimbursed.

To ensure compliance with these new rules, PSPs must act now to enhance their fraud prevention capabilities and ensure they can meet the operational demands of the new reimbursement scheme. AJC is available to provide expert support in this area, helping PSPs navigate the regulatory landscape and establish robust systems for managing APP fraud claims.

For more information or assistance, please contact us at 020 7101 4861.

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*Source: PSR: CP 23/6 – Data provided by UK Finance on behalf of eight PSPs for H2 2022.