Enforcing the liability of payment service providers for fraudulent transactions

Issue 371 | 17 August 2022

Enforcing the liability of payment service providers for fraudulent transactions

In this edition of Payments:Unpacked we take a look at the topic of the liability of payment service providers for fraudulent transactions which features within the Financial Services and Markets Bill which is currently at its Second Reading in the House of Commons.

This email provides all you need to know about the Government’s work to address any barriers to regulatory action regarding enforcing the liability of payment service providers for fraudulent transactions.

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A précis for the layperson

At almost 330 pages the Financial Services and Markets Bill makes heavy and, to the layman, confusing reading but helpfully the accompanying Explanatory Notes (234 pages) unwraps the detail of the Bill in a more manageable form.

For some delving into the 550+ pages will be a necessity but, for the rest of us, here is a précis of the aspects of the Bill relating to addressing any barriers to regulatory action regarding enforcing the liability of payment service providers for fraudulent transactions.

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Financial Services and Markets Bill

The Financial Services and Markets Bill was introduced to Parliament on 20 July 2022.

The Chancellor’s speech at the Financial and Professional Services Dinner at Mansion House on 19 July 2022 set out the importance of the financial services sector to the UK economy, and the central role of the Financial Services and Markets Bill in delivering the government’s vision for an open, green, and technologically advanced financial services sector that is globally competitive.

The UK Government states that:

The Bill seizes the opportunities of EU Exit, tailoring financial services regulation to UK markets to bolster the competitiveness of the UK as a global financial centre and deliver better outcomes for consumers and businesses.

The Bill seeks to:

• Implement the outcomes of the Future Regulatory Framework (FRF) Review

• Maintain the UK’s position as an open and global financial hub

• Harness the opportunities of innovative technologies in financial services

• Bolster the competitiveness of UK markets and promote the effective use of capital

• Support the levelling up agenda, promote financial inclusion and consumer protection.

At almost 330 pages the Financial Services and Markets Bill makes heavy and confusing reading but helpfully the accompanying Explanatory Notes (234 pages) unwraps the detail of the Bill in a more manageable form.

The Government states that:

…the Bill introduces measures that support financial inclusion by ensuring people across the UK can continue to access cash with ease; enabling credit unions to offer more products; introducing a regulatory gateway designed to improve the quality of financial promotions; and enhancing protection for victims of authorised push payment scams.

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Enforcing the liability of payment service providers for fraudulent transactions

The explanatory notes explain the government’s position on enforcing the liability of payment service providers for fraudulent transactions via the Financial Services and Markets Bill - but here’s a quick summary:

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The value and volume of ‘authorised push payment fraud’ (APP) is increasing in the UK.

The value and volume of “authorised push payment” (APP) scams has increased significantly in recent years. An APP scam occurs when someone is tricked into making a payment to a fraudster under false pretences, for example, where someone is deceived into authorising a payment to a person for something they believe at the time is a legitimate purchase.

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Currently there is a discrepancy regarding protection for the end user between ‘unauthorised’ and ‘authorised’ payment fraud.

APP scams are different to unauthorised payment fraud, where money is taken from someone’s account without their knowledge or consent. Victims of unauthorised payment fraud are protected by legislation, with statutory requirements on payment service providers (for instance, a payer’s bank) to reimburse victims for the losses they incur under such circumstances.

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The government acknowledges that some PSP’s have taken voluntary action to protect the end user regarding unauthorised payment fraud (APP Fraud).

Although no statutory reimbursement requirement exists for APP scams, some payment service providers have made voluntary commitments to reimburse APP scam victims in certain circumstances, including by signing up to a voluntary contingent reimbursement model code that sets a framework for how liability should be apportioned when a scam occurs.

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This voluntary action by some PSPs has led to inconsistencies in end user protection determined by the choice of payment provider and / or PSP interpretations.

Although no statutory reimbursement requirement exists for APP scams, some payment service providers have made voluntary commitments to reimburse APP scam victims in certain circumstances, including by signing up to a voluntary contingent reimbursement model code that sets a framework for how liability should be apportioned when a scam occurs.

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The Payment Systems Regulator (PSR) has proposed options to address the problem for transactions that are processed via Faster Payments.

The Payment Systems Regulator (PSR) regulates designated payment systems and their participants (including banks and other payment service providers). In 2021, the PSR published a Call for Views, and subsequent Consultation, on APP scams. In these documents, the PSR proposed options to address the problem, including requiring participants in the Faster Payments Service to reimburse APP scam victims. The vast majority of APP scams occur over the Faster Payments Service, as it is the principal payment system which payers use to make instant credit transfers.

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But…..