The Payment Systems Regulator’s proposal to lower the APP fraud reimbursement limit

The UK Payment Systems Regulator (PSR) is introducing a new mandatory reimbursement policy in an attempt to protect victims of authorised push payment (APP) fraud. APP fraud occurs when businesses or individuals are tricked into sending money to scammers. These scams can cheat victims out of very large sums of money and can also be very emotionally distressing, particularly for individuals.

While there are various limitations to the scope of the policy – for example it only applies to payments made through the UK’s Faster Payments system, thereby excluding international payments (even those made to UK-based banks) – it remains a significant shift in attempts to protect consumers from APP fraud.

In August 2023, the PSR proposed that victims would be reimbursed up to a limit of £415,000, which matched the (then) amount recoverable via the Financial Ombudsman Service (FOS). This limit was explained as being well understood by consumers, and as capturing 99.98% of APP fraud victims. The PSR also stated that the proposed cap would incentivise banks and other payment service providers (PSPs) to implement measures aimed at reducing APP fraud losses.

The new consultation

However, following pressure from PSPs and industry groups, on 4 September – little over one month before the policy was due to come into force – the PSR announced a consultation on whether to reduce the cap to £85,000 – the amount available to consumers under the Financial Services Compensation Scheme (FSCS). This is despite the PSR previously stating that it regarded a limit of £85,000 as ‘too low’ and that it would ‘exclude a significant number of victims’ who would suffer ‘significant harm’ where defrauded above the cap.

The PSR’s consultation paper explains that the £85,000 limit was also well understood by consumers (being the FSCS limit), and that new data suggests that 99% by volume, and 90% by value, of victims would still be fully compensated. It says that lowering the limit would create only a small – if any – decrease in the incentive to PSPs to introduce APP fraud detection and prevention measures. But that it may reduce the ‘prudential risk’ – i.e. the risk of reimbursement levels becoming unsustainably high for PSPs, particularly smaller ones, such that their solvency is threatened. Additionally, the lower reimbursement limit may mean that PSPs have more funds available to introduce fraud prevention measures, the paper says.

The concerns

Clearly the proposed reduction in the reimbursement limit will be welcomed by PSPs and will disappoint consumer groups.

The consultation paper is clear that the PSR considers most, if not all, of the reasons for the lower limit put forward by PSPs to be marginal. It focuses on the PSR’s view that the lower limit will still fully compensate the vast majority of victims. But this cuts both ways – if that is right, then the financial impact to PSPs of lowering the cap must also not be terribly material, which begs the question why not leave the limit at £415,000 in order to catch almost all victims? Based on the PSR’s 2023 data, all but 18 victims out of some 250,000 would then be reimbursed fully.

The PSR consultation confirms that the limit will be reviewed after 12 months to assess its effectiveness, with the option of potentially increasing it. But the current proposed (and likely) reduction initially remains very disappointing for consumers – at least those who may fall victim to the highest value APP scams over the next 12 months – as the level of protection they will be afforded will be greatly reduced.

There is another, perhaps less obvious or easily measured, issue with the lower limit. A victim who has recovered part (£85,000) of their losses via the mandatory reimbursement policy will still be able to seek to recover the balance from PSPs via the FOS or indeed via formal court action. For PSPs this means that, rather than simply reimbursing customers fully under the policy (50/50 between paying and receiving PSPs), they will instead be faced with the time and costs of dealing with multiple FOS and court cases regarding the balance. Those cases will require management and in-house legal time, and many will require the instruction of external lawyers. Some may even end up in the Supreme Court at considerable expense – see most recently Philipp v Barclays. And so, it remains to be seen whether lowering the limit will actually reduce the cost to PSPs at all, or whether it is in fact a false economy.