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Despite a last-minute reduction in the cap, UK payment service providers (PSPs) are worried that the new rule on authorised push payment (APP) scam reimbursement may cause more harm than good.
Last week, the Payment Systems Regulator (PSR) confirmed a significant reduction in the reimbursement cap for Faster Payments APP scams, lowering the limit from £415,000 to £85,000 per claim.
This policy, effective from today (October 7), has triggered concern among payments and e-money firms, which are increasingly fearful that such large reimbursement requirements could have a considerably negative prudential impact on them. The possibility has even been raised in the past that firms could have no choice but to exit the UK market, and time will tell now that the regulation is in force.
Despite this, the PSR has stayed on track with the new rules.
“Today is a very important day in making it quicker and simpler for victims of APP scams to get back money they’ve lost to criminals, with a guaranteed minimum level of protection in place,” commented David Geale, managing director of the PSR.
Geale continued that the new requirements will see all payment firms involved facing strong incentives to introduce more robust ways of identifying and preventing these scams from happening in the first place. “Firms have already made a good start in making changes and we expect to continue seeing new and innovative systems being rolled out to drive fraud out of our payment systems.”
Mixed responses
The PSR’s policy statement shared industry feedback, with the regulator acknowledging that respondents had warned that smaller PSPs and fintechs, particularly those in their early stages, could face increased liabilities under the new reimbursement rules.
This is because they will likely feature more as a sending PSP as they grow, which may increase their potential liability under the policy.
Some stakeholders highlighted the risk of insolvencies or disorderly market exits, which could, in turn, harm consumer financial well-being.
The consultation feedback also revealed that e-money institutions noted the danger of a single fraud case exceeding the minimum capital requirements, further highlighting the negative impact these rules could have on smaller firms.
However, other respondents argued that lowering the cap could actually support PSPs by reducing their exposure to fraud claims, and some pointed out that the reduced liability might foster growth and innovation in the UK payments sector, making it easier for new entrants to thrive without the financial burden of high-value claims.
Overall, consultation on the reimbursement cap drew 147 responses, with 120 respondents advocating for the cap to remain at £415,000. Twenty respondents, including industry bodies and businesses, supported the reduction to £85,000, while seven expressed mixed views.
Pleasing no one?
The PSR’s decision to reduce the cap has been divisive for stakeholders, and seems to have hardly appeased the banking and payments industry that had been ringing alarm bells.
“Most of our PSP members still argue that setting the reimbursement limit at £85,000 is too high and may lead to those unintended consequences,” the Payments Association said in its response, warning that even the reduced cap will likely lead to increased first-party fraud and PSPs and investors exiting the market.
The Payments Association continues to advocate a lower limit of £30,000, “which we believe is more appropriate because it strikes a better balance between consumer protection and financial firm responsibilities”.
This limit of £30,000 is based on Section 75 of the Consumer Credit Act 1974, which requires a credit card issuer to step in where a merchant fails to provide goods or services purchased by consumers using a credit instrument.
According to the Payments Association, this is “a good example of a transaction-based protection and has been in place for over 50 years without any major challenges to the functioning of the industry”.
“Indeed, the card schemes have built up a well thought out dispute resolution mechanism called “chargebacks” and we would advocate a similar solution should be created for Faster Payments.”
The policy change has also agitated consumer interest groups.
For example, Rocio Cocha, director of policy at Which?, commented that “somehow the regulator's conclusion is that these people should be abandoned to provide a small benefit for parts of the finance industry that have been warned over their role in facilitating financial crime”.
In a press statement when the revised cap was announced last month, Concha accused the PSR of having “caved into pressure”, saying that the regulator has “dropped the crucial principle that a higher reimbursement limit gives the finance industry strong incentives to invest in improved fraud security measures, which could have disastrous consequences for victims”.
Financial lobby group UK Finance said in its consultation response that “while our members remain divided as to the most suitable monetary value for this policy feature, with strong opinions asserted on both sides, one area of concern appears almost consistently across our members”.
This concern is that the reduction in the limit will ultimately not reduce the potential exposure for PSPs due to uncertainty surrounding the procedures related to the Financial Ombudsman Service.
However, UK Finance concedes that “in reducing the per claim financial risk for firms, the PSR is delivering on its statutory objectives for competition and innovation”.
“The high upper threshold of £415k has been of significant concern to fintechs, new banks and regulated electronic money institutions, many of which have very slim profit margins and do not operate at scale to subsidise losses,” the response says.
“The prudential and authorisation requirements for these firms do not today include or contemplate financial provisions to insure consumers against these losses, which are unpredictable and uncapped on a cumulative basis.”
The Electronic Money Association commented that “the reduction of the maximum reimbursement threshold to £85,000 alleviates to some degree the prudential risk to which smaller PSPs have greater exposure”.
“This is particularly important for early stage, externally funded, innovative firms that tend to have mono-line product offerings,” the trade association said.
The PSR’s justification
The PSR emphasised that the new cap would still fully reimburse 99.8 percent of APP scam cases by volume and 90 percent by value.
The regulator believes this strikes a balance between protecting consumers and mitigating prudential risks for PSPs, and says that the new cap aligns with the Financial Services Compensation Scheme (FSCS) deposit limit (although it will not automatically track any future changes to the FSCS limit).
The PSR acknowledged fintech industry concerns, noting that higher reimbursement levels could risk insolvency for smaller firms struggling to meet reimbursement liabilities, invest in financial crime controls or cover additional operational costs.
The regulator also acknowledges the risk “that a small number of firms could exit the market as a result of these requirements, but that it is difficult for us to quantify the likelihood of these risks materialising and their impacts”.
“Although the additional evidence is limited, we judge that taking a precautionary approach at this stage is appropriate.”
The PSR has committed to reviewing the reimbursement policy within 12 months to assess its impact on the market and whether further adjustments are necessary.
