UK City minister hits out at watchdog’s fraud refund plan

The UK’s City minister has criticised plans to force banks and payment companies to reimburse fraud victims up to £415,000 from October, in the latest sign of growing tensions between the Treasury and regulators.

Bim Afolami told the Financial Times there were “significant problems” with the proposed rules, following industry warnings that the new regime could force some smaller payment system providers out of business and encourage crime. 

Afolami and chancellor Jeremy Hunt want Britain to be the pre-eminent European tech hub and the best place to build a business, but they fear watchdogs are stifling growth in their determination to bear down on risk.

The latest flashpoint is focused on a set of rules by the Payment Systems Regulator requiring the payments industry to refund victims of “authorised push payment” fraud up to a maximum of £415,000 per claim.

Britons lost about £240mn to APP fraud — which includes purchase scams, online investment schemes, and criminals tricking victims into sending them money by posing as a contact — in the first half of 2023, the latest period for which data is available, according to trade body UK Finance.

Under the rules, which the PSR laid out at the end of last year, victims will from October be able to claim up to £415,000 in compensation from banks and payment service providers including building societies, e-money companies, remittance services and credit card issuers. 

In a letter sent to Afolami last week, about 30 members of the Payments Association, an industry body, warned that the costly changes could threaten the survival of smaller fintech companies.  

“It’s no surprise to see UK challenger banks and payment firms push back on the PSR’s fraud victim refund plan because many simply can’t afford to do it,” said Silvija Krupena, director at RedCompass Labs, one of the letter’s signatories.

UK Finance, which represents the banks, said it had also highlighted to the PSR “a number of issues” about the rules, “including that they may encourage more complicit fraud”.

One particular concern is that the changes will lead some fraudsters to pose as victims in order to illegitimately recoup compensation money.

“I was not in favour of what they did but I did not have any legal ability to stop it,” Afolami said of the regulator. “It was entirely a PSR decision.”

“They agreed that they would review the evidence this year to see whether mine and the industry’s fears had been realised. I do think there are significant problems with this,” he added.

The PSR said: “By introducing our new reimbursement requirements, we’re significantly increasing protections for people. Our approach incentivises all payment firms to prevent APP fraud from happening in the first place.”
 
It added that industry was “working hard to implement the systems and processes needed for the new reimbursement requirements”.

One person familiar with the PSR’s strategy said smaller payment firms worried about potentially high claims should ensure they had proper financial crime controls in place before processing transactions worth up to £415,000.

Afolami will meet industry leaders on Tuesday to discuss the sector’s concerns, as fears grow over potential financial disruption from the new regime in October, possibly around the time of a general election.

The public criticism of regulators by Treasury ministers reflects intense frustration that the watchdogs are not taking sufficiently seriously their new secondary legal objective to promote growth and competitiveness.

Hunt recently told the FT that the Financial Conduct Authority should look again at its proposal to “name and shame” some companies at an early stage of an investigation, a rare criticism by a minister of an independent regulator.

The chancellor said on Friday that the FCA was working well in some areas, including drawing up plans to change listings and prospectus rules to make the London stock market “every bit as competitive as Nasdaq”.

But he added: “There’s a need for culture change. Sometimes the biggest change you make in politics isn’t when you change the law but when you change people’s minds and change people’s mindsets.

“I don’t pretend that it may take a while for that culture change to play through all our regulators.”

Like the payments association, UK Finance has argued for a lower APP fraud compensation threshold, in line with the £85,000 Financial Services Compensation Scheme, the safety net for customers of failed firms.

Banks have also been campaigning to share the cost-burden of fraud with tech and telecoms companies.

UK Finance said the financial services sector was “the only one that reimburses victims . . . despite the fact the majority of fraud originates through online platforms or telecommunications. These sectors need to do a lot more to . . . contribute to the cost of reimbursement.”

Almost 80 per cent of APP fraud starts online, according to its research.