The authors of this article argue that regulators and legislators may need to act again to regulate future dealings between banks and their clients. This article concerns a type of fraud – authorised push payment – that has become a problem.

The following article about a new reimbursement scheme in the UK called authorised push payment fraud, sheds light on an aspect of financial misconduct. APP fraud concerns what happens when someone is tricked into sending money to a fraudster posing as a genuine payee. In this digital age – and now with AI in the arena – the potential for deception is great. New rules taking force in the UK are designed, their framers hope, to reduce the problem and its impact. As ever, there are costs for compliance as well as benefits. 

Article authors Rosie Wild, a partner at disputes firm Cooke, Young & Keidan and Iason Pafitis, a paralegal at Cooke, Young & Keidan explain new measures and how they work. This is a technical subject, but an important one for those in financial services to grasp. We are pleased to share this content; the usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com if you wish to comment.

Under the controversial new rules coming into effect on 7 October, in cases of APP fraud, unless certain circumstances apply, banks will need to reimburse victims of APP fraud within five business days. The reimbursement burden will be split 50:50 between the sending and the receiving banks. Initially the rules provided for a maximum reimbursement of £415,000 ($542,795) per claim but, following significant review, this amount has now been reduced to £85,000. However, the scheme is still expected to cover over 99 per cent of all claims (in volume). 

In this context, banks are also set to acquire new powers that would allow them to delay the execution of customer transactions by up to four business days. Currently, banks are required to credit the amount of a payment transaction by the end of the next business day from receiving the order. According to draft legislation published in March, banks will be able to use these powers where there are reasonable grounds to suspect that a payment order has been placed subsequent to fraud or dishonesty. 

Alongside these new powers, banks will no doubt want to consider increasing internal measures to prevent APP fraud. Not only will they need to reimburse customers in successful claims but in any given case the onus will be on them to show that one of the exceptions within the new scheme applies. It is worth noting that these exceptions are limited. In most cases, banks will need to reimburse payments except where a customer has been grossly negligent.

Arguably, cases of APP fraud can be harder for banks to detect given that the payments are authorised by the customer (albeit acting under the influence of fraud). Under the new scheme, the risk of loss that customers normally take with each instruction is placed largely on the banks, which are faced with a difficult balancing exercise. On the one hand, banks must ensure that they have the tools in place to spot fraudulent activity on customers’ accounts, both to protect customers and also, in their own interests, to keep reimbursement costs low. On the other hand, they must ensure that they carry out instructions in accordance with the customer mandate in order to avoid breaches of contract and subsequent possible claims from customers for not executing the payment instruction(s) in question.

While the new rules provide customers with robust protection against losses resulting from APP fraud, other customer claims and potential losses might arise out of prevention measures that banks might take in response to the new scheme. It is not difficult to imagine that freezing a customer’s payment for four business days could have very serious consequences and, of course, not every transaction that appears suspicious is fraudulent – for example, a large transfer for a legitimate house purchase. Banks may therefore consider amending terms with their customers to help allay the risks of freezing genuine payments. At any rate, it is likely that some customers may need to spend time (and stomach the inconvenience) of dealing with banks’ investigations aimed at avoiding reimbursement. 

It remains to be seen how the new scheme will work in practice, how much it will be relied upon, and how often banks can successfully rely on the exceptions within the scheme. The new regime certainly gives rise to difficult questions. For example, what determines whether a customer’s failure to report a scam claim promptly was grossly negligent or not? 

While the courts have made it clear in recent cases that APP fraud should be a matter of social policy for regulators and the government, they might need to step in again to regulate future dealings between banks and their customers.