APP fraud: UK government publishes draft legislation allowing PSPs to delay payments for fraud concerns

What’s in the draft regulations?

Under the draft Payment Services (Amendment) Regulations 2024:

• The PSRs are amended to allow PSPs to delay the execution of an outbound sterling payment within the UK by up to four business days from the time a payment order is received. Currently, the PSRs require that once a payment order is received, the payer’s PSP must ensure that the amount of the payment transaction is credited to the payee’s PSP’s account by the end of the next business day (D+1).
• The delay will be permissible only where the payer’s PSP has reasonable grounds to suspect a payment order from a customer has been placed following fraud or dishonesty by someone other than the customer and those grounds must be established by no later than the end of the business day after the day when the payment order is received.
• The delay may also only be used where the payer’s PSP requires further time to contact the customer or other relevant third party, such as law enforcement, to establish whether to execute the payment.
• The payer’s PSP will be required to inform customers of the delay, the reasons for it and any information or actions which the PSP needs from the customer to decide whether to make the payment. This notification must be given or made available in an agreed manner as soon as possible and no later than end of the business day after the payment order was received. This notification isn’t required where it would be unlawful (for example, contrary to anti-money laundering or economic crime law). This is similar to existing requirements on PSPs under the PSRs to notify customers about the refusal of a payment.
• PSPs will be liable for any interest or charges resulting from a delay to payments.

The draft legislation does not make any changes to the PSRs for inbound payments. The government considers that PSPs are already permitted to do this in certain circumstances under existing financial crime legislation.

The accompanying HM Treasury policy note makes it clear that the draft instrument is still in development. The drafting approach, and other technical aspects of the proposal, may change before the final instrument is laid before Parliament.

What else is being proposed?

Under the draft regulations, the corporate opt out will be available for this new obligation. PSPs will therefore be able to agree with their larger business customers not to delay payments in this way.

In addition, HM Treasury expects the FCA to engage with PSPs over compliance reporting requirements relating to the new provisions.

Next steps

The government is publishing the draft legislation for technical checks and welcomes comments on it by 12 April 2024. The government intends to lay the legislation before Parliament in summer 2024, subject to Parliamentary time allowing. The government intends  that the legislation will take effect on 7 October 2024 at the same time as the Payment Systems Regulator's new rules on mandatory reimbursement for APP fraud. Take a look at this Engage article for more information on the new mandatory reimbursement requirement.

The government will set out its wider approach to the PSRs as part of delivering a Smarter Regulatory Framework for financial services in due course. For more on HM Treasury’s January 2023 review and call for evidence on the PSRs, which closed in April 2023, take a look at this Engage article.

If you would like to discuss this development or any related payments issues, please get in touch with one of the people listed above or your usual Hogan Lovells contact.

Authored by Virginia Montgomery and Stephen Timbrell.