Implications of the new regime
The PSR believes that the new reimbursement requirement will significantly lower the level of APP fraud by incentivising PSPs to identify and stop it at source. However it doesn’t give any specific figures for the decreases it expects to see. It also cites other benefits, such as consistency across the payments ecosystem, greater data sharing between firms, and increased confidence in Faster Payments.
The need for action to tackle APP fraud is clear, and the model offers undoubted benefits for consumers. However, some potential negative consequences loom. For one, there may be an increase in friendly fraud as consumers look to abuse and profit from these added protections. While the PSR lists first-party fraud as an exception for APP fraud claims, it will be difficult in practice for financial institutions to definitively prove that a customer is acting fraudulently while simultaneously upholding other regulatory obligations, such as those outlined in the Consumer Duty. Nevertheless, financial institutions should fortify their first-party fraud controls to protect against exploitative actors.
Other impacts include a potential increase in customer negligence. Consumers might rely on the fact funds will be reimbursed if they make a risky transaction, increasing the risk of moral hazard. While the PSR will outline requirements in the ‘customer standard of caution’ to help define ‘gross negligence’, the burden of proof will fall on the PSP, making it an operational challenge.
Another potentially serious consequence is banks derisking customers that may be more likely to fall victim to APP fraud. Traditionally, victims of fraud have consisted of more vulnerable groups such as older and less technology-savvy individuals. As financial institutions contend with potentially high reimbursement costs, they may consider refusing or offboarding vulnerable customers or past fraud victims (who are highly likely to be targeted again) because of the new financial liability they pose. However, there is no evidence this is even a sound approach. There is growing evidence that the profile of traditional fraud victims is changing and in reality, as scams become increasingly sophisticated, anyone is susceptible to falling for APP fraud.