Doubtless Sir Keir Starmer and his team’s in-tray will be overflowing. But there is an impending crisis in the little-heeded world of payments regulation that should be high on their agenda.
New rules to combat Authorised Push Payment (APP) fraud threaten unintended consequences which will cut across the new government’s policy priorities in areas such as fighting crime, promoting financial inclusion, driving economic growth and ensuring that technology giants pay their way.
APP fraud involves consumers being deceived into sending money for goods or services that never arrive. Event tickets are a classic example during this summer of the Euros, Olympics, Glastonbury and Taylor Swift concerts. The latest UK Finance data showed that almost GBP 460 million was lost to more than 230,000 such scams last year.
In October 2024, the new regulatory regime for APP fraud designed by the Payment Systems Regulator (PSR) will come into force. It will require the ‘send’ and ‘receive’ banks involved in facilitating that payment to split the cost of reimbursing almost every victim of any reportedly fraudulent transfers, up to GBP 415,000 (subject to an excess payment of GBP 100).
Clearly this is a well-intentioned effort to protect consumers against a tidal wave of increasingly sophisticated scams. But, as with any policy or regulation, the devil is in the detail. And the payments industry is sounding the alarm about some major shortcomings, in both the rules and the timing of their implementation.
First and foremost, there’s the question of incentives – what those in the financial industry often refer to as ‘moral hazard’. Making banks and other financial institutions liable for essentially the entire cost of fraudulent payments will only encourage criminals, and perhaps even false claims. A system that almost guarantees reimbursement to victims inadvertently lowers the perceived risk for scammers.
At the same time, the new rules may, counterintuitively, disincentivise financial institutions from investing in their fraud detection capabilities. Automatically splitting the costs equally between ‘send’ and ‘receive’ institutions, rather than having an adjudication process to determine whose systems were at fault, puts firms on the hook for mistakes made on the other side of the transfer. Why would a bank or fintech company invest in catching those fraudulent transactions it can prevent, when it foots half of the bill for its competitors’ failures?
In its manifesto, Labour committed to introducing a ‘new expanded fraud strategy’, recognising the urgent need to tackle what has become the most commonplace crime in the UK. Authorities are already stretched to breaking point in terms of their resources and capacity to investigate even a tiny fraction of fraudulent activity. The rules, as currently designed, risk pouring petrol on this fire and compounding the challenge facing the new government.
Secondly, there is the question of how this impacts the UK’s financial services sector – and particularly smaller fintech companies with far less budget to cover the resulting costs compared to the big banks.
Our ecosystem of fintech startups is one of the most dynamic and innovative parts of the UK economy. It is an increasingly rare market segment where we can plausibly claim to be not only globally competitive, but genuinely world-leading. Yet we are talking about saddling them with a big new liability, to the benefit of the incumbent banks.
This will also hurt consumers’ spending power. Financial institutions will be less likely to offer instant payments, hurting consumer choice. Underserved demographics who rely on specialist fintech providers will be disproportionately impacted.
For a Labour government, whose central objective is to drive economic growth, that should set alarm bells ringing. At the very least, as a mitigant, there should be some form of support or central fund to help smaller fintech companies manage the financial and operational burdens that the new rules would impose.
Finally, and perhaps most glaringly, the new rules make no provision for social media companies to share in the burden of reimbursement. A huge proportion of APP fraud takes place on platforms like Facebook Marketplace – with over three quarters originating online, according to UK Finance. These are some of the biggest and richest companies in the world, at least every bit as involved in a fraudulent transaction as the bank that facilitates the transfer, but they’re getting away scot-free.
The PSR would, very legitimately, point out that it’s not within their purview to regulate social media companies. So, this is where a legislative intervention becomes necessary.
Labour’s manifesto committed to ‘working with technology companies to stop their platforms being exploited by fraudsters’. That would be a good start. However, it must extend to the technology giants sharing in the responsibility to reimburse customers, so that they have the same financial incentives to root out fraud as banks and fintech firms. We are therefore encouraged by recent news reports that. Labour is exploring a new approach to APP reimbursement which would make tech companies share in the financial obligation.
Naturally the PSR and other regulators are independent, arms-length bodies. That independence and predictability has been an important contributor to the success of the City of London and the UK financial services industry.
But governments also, rightly, set the parameters within which regulators operate. And here we have a major new regulatory initiative which threatens to undercut some of the key policy priorities of a government which looks to have just won a historic majority.
There are other reasons that this an opportune moment to reevaluate course. The PSR is undergoing a leadership transition. An industry-wide outcry against both the design of the new rules and the lack of detail around how some of the proposed processes will work has built to a crescendo in the past couple of weeks. And, in purely practical terms, an October implementation timeline is unacceptably risky and just unfeasible given that the case management system has not yet been tested.
So far, this litany of industry concerns feels like it has been ignored. But we have just had a major shift in the national political landscape. In our world of payments regulation, the times should be changing as well.
About Virraj Jatania
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