APP fraud: Final draft payments delay SI and UK PSR policy statement on maximum reimbursement level

Of particular interest to: All banks, building societies and other PSPs subject to the Payment Services Regulations 2017 (PSRs 2017) and within scope of the new FPS and CHAPS mandatory reimbursement requirements.

Key takeaways

Final draft Payment Services (Amendment) Regulations 2024

HMT has published a final draft of the Payment Services (Amendment) Regulations 2024 on a webpage which states that they will be laid before Parliament shortly after its return from conference recess in the week commencing 7 October.

• Final draft largely unchanged: There are a few clarificatory amendments such as the addition of a new regulation 94A (Liability of payment service provider for charges and interest as a consequence of delay under regulation 86(2B)) to the PSRs 2017 setting out exactly what a payment service provider (PSP) will be liable to a payment service user (PSU) for if they use the payments delay provisions. Other than this, the final draft Regulations are largely the same as the draft that was published in March (see our previous Engage article).
• Timing of entry into force: It has been reported that the Regulations will enter into force at the end of October, although obviously this will be subject to the Parliamentary process.

PSR policy statement on reduction of maximum reimbursement level

As it mentioned in its statement on 25 September (see our previous Engage article), the PSR has published a policy statement explaining in more detail the decision to reduce the maximum reimbursement level under the new FPS and CHAPS regimes to £85,000.  A cost benefit analysis for the decision has also been published.

• Maximum level no longer automatically tracking FSCS limit: One change from the PSR’s September consultation is that the FPS maximum level won’t now automatically track any changes to the FSCS limit. The vast majority of respondents to the consultation did not support the tracking proposal. The PSR now considers it important that any change to the maximum level be at the PSR’s discretion, based on up-to-date fraud information and data, and subject to consultation, before any future changes come into effect. However, it also confirms its continuing commitment to ensuring the maximum level is a figure with which consumers are familiar. It notes that the PSR is due to review the FSCS limit before the end of 2025, so it will be able to take any change into account before finalising its 12-month evaluation of the reimbursement requirement. As for FPS, the aligned £85,000 maximum level of reimbursement for CHAPS will not automatically track changes to the FSCS deposit limit. The Bank of England is also committed to reviewing this level next year.

• Impact on FOS complaints: The PSR states that, while its evidence suggests that the volume of claims over £85,000 will be low, it does expect the change in threshold to impact the volume and complexity of cases the FOS anticipates receiving relative to the previously proposed limit of £415,000. On this, firms should note that a new PSR webpage aimed at consumers actually points out that where more than £85,000 is lost and not reimbursed, consumers can lodge a claim with the FOS - and that the FOS’ compensation limit is £430,000.

In the policy statement the PSR also points out that, while awards will turn on the specifics of a consumer’s complaint, it is ‘theoretically possible’ for the FOS to make an award up to £85,000 against the sending PSP for any failure to reimburse under the FPS reimbursement requirement and for FOS to make an award (up to the statutory limit of £430,000) for any unrecovered losses if it considers that the sending firm was at fault in some way when making the payments, meaning that it would be fair and reasonable for the sending firm to compensate the consumer for their unrecovered losses. It goes on to mention that the FOS can also make an award against the receiving PSP (if it would be fair and reasonable), meaning consumers could in theory recover loss up to £945,000.

The PSR will continue to engage closely with the FOS and will consider the volume of cases referred to the FOS, and the impact, as part of its 12-month evaluation of the policy.

• Impact on customer communications obligations: The PSR says that it will adopt a ‘pragmatic and proportionate approach’ to directed PSPs’ compliance with their obligations to notify customers of their rights under the reimbursement regime. It expects firms to ‘take reasonable steps to become compliant as soon as practicable’, the nature of which will vary on a case-by-case basis. The PSR will consider - as with any potential non-compliance - a range of factors and circumstances when deciding on whether to intervene. It emphasises, however, the importance of consumers who are submitting a claim being given appropriate information and support through the process.

• PSP incentives to put effective fraud prevention measures in place: The PSR reports that some industry respondents said that receiving firms may not be incentivised to identify and close mule accounts as a result of their potentially reduced liability if more claims against the sending PSP go to the FOS. Views may have changed on this since the recent announcement of a £28,959,426 fine imposed by the FCA on a challenger bank for financial crime failings. In addition, a recent FCA speech on frameworks for effective fraud prevention measures highlighting collaboration and a collective effort as being key to tackling fraud describes stopping the cash-out of the proceeds of fraud through money mule activity as a crucial area for joint action. Firms are asked to adopt a collaborative approach, prioritising not only the sharing of information on suspected mules, but also acting swiftly when that information is received, whether through internal or external channels.

The PSR acknowledges that the wider ecosystem has an important role to play in fraud prevention. In the 2023 Fraud Strategy, it committed to gathering data from payment firms on the private sector firms that are most commonly reported as enabling contact between fraudsters and victims that later result in an APP scam payment. It has gathered data from the UK’s 14 largest banking groups for the 2023 calendar year. Over the coming months, it will engage with relevant stakeholders on publishing this data.

What’s next?

• The go-live date for the new FPS and CHAPS mandatory reimbursement requirements is 7 October 2024. The PSR is continuing its close engagement with Pay.UK and the industry to ensure all that is necessary for effective delivery of the policy is ready for the policy start date. It will also continue to work with stakeholders after the policy has gone live to support ongoing effective consumer reimbursement in line with the policy. It will be closely monitoring the impacts of the new requirements and will carry out an evaluation of their effectiveness after 12 months, so in October 2025. It remains open to considering alternative approaches to setting the maximum level in future.

• In-scope firms may find it useful to know that the PSR has an APP scams publications webpage which provides links to its key related resources including previous consultations, policy statements and directions.

• The Payment Services (Amendment) Regulations 2024 are due to be laid before Parliament shortly after its return from conference recess in the week commencing 7 October and are likely to enter into force by the end of the month.

  The FCA is consulting on amendments to its Payment Services and Electronic Money Approach Document to provide guidance for PSPs on how to apply the new outbound payments delay provisions. Following industry uncertainty about PSPs’ ability to delay inbound payments where they suspect fraud, the FCA is also proposing updates to its existing guidance on when and how PSPs should consider delaying inbound payments. The guidance consultation closes on 4 October 2024. The FCA plans to publish a revised Approach Document by the end of 2024. For more on the consultation, take a look at our previous Engage article ‘APP fraud: FCA consults on Approach Document changes to support proposed payments delay legislation’.

If you would like to discuss any aspect of the new APP fraud mandatory reimbursement requirements or the payments delay legislation, please get in touch with one of the people listed above or your usual Hogan Lovells contact.

Authored by Virginia Montgomery.