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The Payment Systems Regulator's plans (PSR) to put Pay.UK in charge of providing authorised push payment (APP) fraud reimbursement poses a conflict of interest, MPs sitting on the UK’s financial services committee have said in a new intervention.
MPs from both sides of the aisle have complained that Pay.UK is not a regulator and suggest that the PSR’s current plans as being “fundamentally flawed” in a less than flattering new report on fraud reimbursement.
“Putting an industry body in charge of reimbursing scam victims is like asking a fox to guard the henhouse,” remarked Harriett Baldwin, the committee’s chair.
In a statement, Baldwin said that victims of fraud have been waiting far too long for a fair and functional scam reimbursement scheme. “However, while these new proposals are a step in the right direction, the way the regulator plans to implement them is fundamentally flawed.
“The regulator needs to take back control of the reimbursement process, rather than leave it in the hands of an industry body which is inherently conflicted.”
The Treasury Select Committee’s report says that the PSR’s proposal to delegate the mandatory reimbursement of APP fraud victims to Pay.UK through Faster Payments scheme rules is unsuitable on three grounds:
- Pay.UK is an industry body.
- It is “conducive” to creating further delay to an already unacceptably extended process.
- Pay.UK lacks the enforcement powers of a regulator.
Conflicts of interest
The PSR’s consultation on APP scams ran from September to November last year and set out the regulator’s plans for the reimbursement rules, which it has said that it will define.
The PSR’s proposals in its consultation called for Pay.UK, as the Faster Payments system operator, “to undertake the role of making, maintaining, refining, monitoring, and enforcing compliance with” reimbursement rules.
Under PSR plans, financial firms that wish to use the Faster Payments system will only be able to do so by adhering to its rules, including those surrounding APP scam reimbursement.
The payments regulator justified this approach by suggesting that rather than itself directing PSPs under Section 54 of the Financial Services (Banking Reform) Act 2013 to reimburse fraud victims, Pay.UK would be better suited because of its operational expertise and the flexibility offered by using scheme rules.
In its response to the Treasury Select Committee's report, the PSR also argued that the most effective way to make sure victims of APP scams are reimbursed is by using statutory powers to require changes to Pay.UK’s rules.
The PSR’s consultation also considers whether it should use its powers more broadly, by placing further regulatory requirements on payment firms to secure compliance with the requirements in Faster Payments rules.
Yet, the Treasury Select Committee’s report expresses concern that Pay.UK is an industry body. “Its role in authorised push payment fraud reimbursement proposed by the Payment Systems Regulator has inherent conflicts of interest.”
According to lawmakers, these concerns are “particularly acute” where Pay.UK is responsible for ensuring that the banks and building societies that are its own guarantors pay out large sums of money in reimbursement to consumers.
“We are concerned that the Payment Systems Regulator’s current position, confident that its proposals will work well but reserving the right to react with direct intervention if they do not, ignores the extent to which Pay.UK is conflicted,” the MPs said.
MPs also took issue with the speed of action for reimbursement plans.
The PSR’s intention to require Pay.UK to use scheme rules to implement APP fraud reimbursement creates an opportunity for guarantors and other payment service providers — some of which oppose reimbursement — to delay its implementation, including through influencing the Pay.UK board, the MPs warned.
They argue that Pay.UK is less well-equipped than the PSR to deliver mandatory reimbursement quickly.
“Pay.UK requires a consensus of its members to change its scheme rules, whereas the PSR can exercise its powers of direction unilaterally.”
Meanwhile, the bipartisan group said that Pay.UK also lacks effective regulatory tools to ensure the swift compliance of payment service providers (PSPs).
“If the PSR leaves these proposals in the hands of Pay.UK it risks losing control of its timetable and increases the likelihood that mandatory reimbursement — which has already been unacceptably delayed until 2024 — could be delayed yet further,” the MPs implored.
“Victims of APP fraud have been waiting more than long enough. The PSR should ensure the payment systems industry has fully implemented mandatory APP fraud reimbursement by the end of 2023,” the report says.
It has further called on the PSR to provide quarterly updates on progress against that deadline to the sub-committee.
The responses
Speaking to VIXIO, a spokesperson for Pay.UK said that “APP fraud has a devastating financial and emotional impact on victims and it’s vital that everyone in the payments industry works together to defeat it”.
“We welcome the committee’s report and its emphasis on the need for a standardised, regulated approach for all banks and building societies when it comes to APP fraud, so the industry can more effectively work together to ensure that anyone who falls victim to this crime receives fair and consistent reimbursement.”
The spokesperson added that Pay.UK “always said” that it is not a regulatory body.
“The committee rightly acknowledges that Pay.UK is a non-for-profit company limited by guarantee and that our guarantors include several of the major banks,” the spokesperson said.
“However, this does not mean they have any influence on decision making. Our governance model is approved and supervised by the Bank of England and the PSR to ensure our independence.”
The PSR, meanwhile, said that all feedback received, including from the sub-committee, will be considered carefully before any final decision is made on the best course of action.
“We will publish our final position in May 2023,” the PSR confirmed.
The PSR added that payment systems operators, including, for example, Pay.UK, have rules and requirements on their users. “If a bank or other payment provider wants to use these systems, it has to follow the rules set out by the system operator. The PSR regulates these payment systems operators.”
“We are pleased that the TSC supports our proposal around reimbursement in principle,” the PSR said.
“However, the report does include a misinterpretation of our proposal on how our powers can be used to require this. We have provided clarification to the TSC on this matter.”
