The dispute over the British fraud compensation system

Some in the Treasury Department are calling the system “a looming disaster,” while consumer advocates say it provides “vital protection for fraud victims.”

A new system that will force banks and payment service providers to refund fraud victims up to £415,000 is due to come into force on October 7. The City fears the plan could bankrupt smaller firms and is lobbying hard to delay or water down the measures.

The plan has now become a bone of contention between ministers, who must respect the independence of the City's regulators, and the Payments Systems Regulator, which is determined to push ahead with the plan.

Why are banks forced to pay compensation?

In 2023, Britons lost £459.7 million to authorised push payment (APP) fraud, in which a person is tricked into transferring money from their bank account to a fraudster posing as a genuine payee.

The money is usually transferred to accounts the fraudsters hold at other UK banks. APP scams include purchase scams, online investment schemes and criminals who trick victims into sending them money by posing as a contact.

Three-quarters of APP fraud cases originated on the internet and a further 16 percent in the telecommunications sector, according to the latest fraud report by banking lobby group UK Finance.

Banks and payment service providers currently reimburse their customers for fraud losses on a voluntary basis at very different rates. Some reimburse almost 100 percent of cases, others less than 10 percent.

The previous Conservative government passed the Financial Services and Markets Act 2023, which instructed the Payments Systems Regulator to develop proposals for a unified fraud recovery system.

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

The PSR had originally planned to implement the rule in April, but then postponed it to give industry more time to prepare.

Why do the banks have a problem with the regime?

The city argues that the compensation cap of £415,000 is too high and encourages fraud rather than helping to combat the problem.

They argue that fraudsters may set up fake online deals with an accomplice who demands maximum compensation from a bank and then splits the proceeds.

UK Finance also recently warned City Labour minister Tulip Siddiq that the debt collection system needed to implement the new rules may not be ready by October 7, people familiar with the matter say.

The system, to be operated by Pay.UK, an operator of interbank payment systems, is needed to assess claims and appropriately allocate liability between the sending and receiving payment companies.

According to UK Finance, the implementation of the rule in October is likely to lead to “confusion and disputes” over what counts as APP fraud and who should be responsible for refunding consumers.

Rocio Concha of consumer group Which? said victims of fraud have already been “at the mercy of an unfair and inconsistent refund lottery for longer than necessary”.

She added: “The government's aim to stimulate 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 had vehemently defended its plan and pointed out that the measures had been the subject of lengthy consultations.

“Competition and protection for consumers and businesses go hand in hand,” it said. “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 companies operating in the UK take the right steps to prevent fraud in the first place,” it added.

Should technology companies bear some of the burden?

There is bipartisan agreement that the technology companies that provide platforms for online sales should bear some of the burden of compensating fraud victims.

In June, Labour criticised “big tech companies” for doing “very little” to combat online fraud or compensate victims as the party outlined plans to share the burden of costs with banks.

Former Conservative City minister Bim Afolami agreed that tech companies needed to do more, saying: “I have long been of the view that there needs to be a much fairer burden-sharing between the banks and the tech companies.”

However, the previous Conservative government explored the idea of ​​extending reimbursement to technology companies and concluded that this would be neither proportionate nor effective.

Labour does not currently have laws forcing technology companies to pay compensation, nor did it mention any plans to do so in its first royal speech.

Antony Walker, deputy CEO of industry body techUK, said technology companies are “well aware of the impact of fraud and continue to implement numerous sophisticated measures every day to detect and combat online fraud”.

What will the new Labour government do?

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

It also wants to see a review of the impact of the new rules six months after they are introduced, the people said. The PSR has said it will keep a close eye on the new regime in any case.

Labour has made promoting economic growth one of its five “missions” in government, continuing a Tory programme aimed at pushing independent regulators to do more to promote growth.

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