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Some in the Treasury call the scheme “a disaster waiting to happen”. But for consumer advocates, it provides “vital protections for scam victims”.
A new regime forcing banks and payment companies to reimburse fraud victims up to £415,000 is due to start on October 7. The City, which fears the plan could force smaller firms out of business, is lobbying heavily to delay or weaken the measures.
The scheme is now a flashpoint between ministers, who are obliged to respect the independence of City watchdogs, and the Payments Systems Regulator, which is determined to press ahead with the plan.
Why are banks being forced to pay compensation?
In 2023 Britons lost £459.7mn to authorised push payment (APP) fraud, where someone is tricked into sending money to a fraudster posing as a genuine payee from their bank account.
The money is typically sent to accounts the fraudsters hold at other UK banks. APP fraud includes purchase scams, online investment schemes, and criminals tricking victims into sending them money by posing as a contact.
Three quarters of APP fraud cases originated from online sources and a further 16 per cent from telecommunications, according to the latest fraud report from UK Finance, the banking lobby group.
Banks and payments companies currently reimburse, on a voluntary basis, customers for fraud at widely varying rates, with some refunding almost 100 per cent of cases, and others less than 10 per cent.
The previous Conservative government in 2023 passed the Financial Services and Markets Act, which instructed the Payments Systems Regulator to prepare proposals for a consistent regime of fraud reimbursement.
Banks and payment service providers including building societies, digital payments firms, remittance services and credit card issuers will be covered by the new regime.
The PSR initially planned to implement the regime in April before delaying it to give industry more time to prepare.
Why do banks take issue with the regime?
The City has argued that the £415,000 ceiling for compensation is too high and will encourage fraud rather than help counter the problem.
Fraudsters may set up fake online deals with an accomplice, who would claim the maximum compensation from a bank and then share the proceeds, they argue.
UK Finance also recently warned Labour City minister Tulip Siddiq that the claims management system needed to implement the new regime might not be ready by October 7, according to people briefed on the matter.
The system to be run by Pay.UK, which operates interbank payment systems, is needed to assess claims and properly split liability between the sending and receiving payments firm.
Implementing the regime in October is likely to lead to “confusion and disputes” over what counts as APP fraud and who should be liable to reimburse consumers, according to UK Finance.
Rocio Concha from consumer group Which? said victims of fraud have already been “at the mercy of an unfair and inconsistent reimbursement lottery for longer than was necessary.”
She added: “The government’s aim to boost economic growth is laudable, but growth built on the backs of scam victims and financial crime is not the answer.”
What has the regulator said?
The PSR had strongly defended its plan and pointed out that the measures have been subject to lengthy consultation.
“Competition and protection for consumers and businesses go hand-in-hand,” it said. “We think it’s important that the UK has a vibrant payments landscape; one where innovation thrives.”
“But it’s equally important that all users are protected and the right steps are taken by all payment firms operating in the UK to prevent fraud from happening in the first place,” it added.
Should tech companies shoulder some of the burden?
There is cross-party agreement that the tech companies that provide platforms for online sales should share some of the burden for reimbursing fraud victims.
In June Labour criticised “big tech companies” who “contribute very little” to tackling online fraud or compensating victims as it drafted plans to make them share the cost burden with banks.
Former Tory City minister Bim Afolami agreed the tech firms needed to do more. He said: “I’ve long been of the view there needs to be much more equitable burden sharing between the banks and the tech companies.”
However the previous Conservative government explored the idea of extending reimbursement to tech companies and concluded it would not be proportionate or effective.
Labour does not currently have legislation to force tech companies to contribute to compensation and did not include such plans in its first King’s Speech.
Antony Walker, deputy CEO of industry body techUK, said tech companies are “acutely aware of the impact of fraud and continue to implement numerous sophisticated measures to detect and combat online fraud on a daily basis”.
What is the new Labour government going to do?
City minister Siddiq is concerned by the tight October 7 deadline and Treasury officials are talking to the PSR to see whether systems will be ready, according to people familiar with the matter.
She also wants to see a review of the impact of the rules six months after their implementation, the people said. The PSR has said it will closely monitor the new regime in any event.
Labour has made boosting economic growth one of its five “missions” in government and has continued a Tory programme of pushing independent regulators to do more to encourage growth.
The question is how far the government will go to pressure independent regulators in pursuit of that aim.