APP fraud: UK PSR consults on reducing the maximum level of reimbursement

Key takeaways

• The PSR is proposing to implement its FPS APP fraud mandatory reimbursement requirement policy with an initial maximum level of reimbursement set at the Financial Services Compensation Scheme (FSCS) reimbursement limit, which is currently £85,000 per Faster Payments APP scam claim. This is instead of the previous limit of £415,000, which had been set to reflect the Financial Ombudsman Service’s (FOS) maximum reimbursement limit (although this has subsequently been raised to £430,000 by the FOS).
• The limit would change to track any revisions to the FSCS limit, and the PSR would review its effectiveness and impact after 12 months as part of its post-implementation review.
• Some stakeholders had previously proposed a cap of £30,000. However, the PSR states that this would not achieve the objectives of its policy or its strategy and it has therefore not considered this option in the current consultation.
• No other changes to the policy or to the implementation date of 7 October 2024 are proposed.
• While the proposed change is good news for in-scope payment service providers (PSPs), reducing the maximum claim limit under the PSR’s requirement is likely to increase the number of complaints made to the FOS. It should also be borne in mind that the FOS has the ability to apply additional award limits (up to the current limit of £430,000) where a complaint falls under their wider jurisdiction e.g. Consumer Duty.

What’s the rationale for the proposed change?

• The PSR has taken on board the concerns expressed by some in-scope PSPs - particularly smaller PSPs – about the impact of the limit on their solvency position, prudential risk, ability to maintain their capital requirements, the cost of capital and availability of investment and the competitiveness of UK firms.
• The PSR has also been working with the FCA to understand the impact of the current maximum level of reimbursement on firms’ prudential positions. The number of firms potentially at risk of financial pressure has increased compared to last year’s analysis. According to the PSR, the proposed new maximum limit is likely to reduce firms’ prudential risk, which could reduce the costs associated with the risks of reduced competition and innovation in the provision of payment services, and the overall cost of the proposed APP scams policy.
• Based on data on high-value scams received from the 15 largest UK firms, representing above 95% of Faster Payments transactions, the PSR points out that 99.8% of all APP scam cases would still fall below the new lower limit, and around 90% of total APP scams value would be reimbursed under the policy, so UK consumers would still be provided with ‘world-leading protections’.

What about the CHAPS APP fraud mandatory reimbursement requirement?

• Regarding the equivalent APP fraud mandatory reimbursement requirement that will also be introduced for CHAPS, the Bank of England (BoE) will adjust the CHAPS maximum level of reimbursement to the FSCS limit of £85,000 if – following this consultation – it is adopted for the FPS policy.
• The BoE would review the maximum level of reimbursement for CHAPS in parallel with the PSR’s post-implementation review 12 months after implementation.
• The PSR states that, as part of the current consultation, it would also be helpful to understand the views of stakeholders on the maximum level of reimbursement for CHAPS and FPS.

What should firms be thinking about?

• While this should be good news for in-scope PSPs, PSPs will still need to consider the impact of a customer also making a complaint to FOS. The PSR states that part of the justification for lowering its reimbursement limit is because:

‘[…] the FOS has the ability to apply additional award limits, where they have a complaint that falls under their wider jurisdiction e.g. Consumer Duty. Therefore, the FOS may consider other bases for handling complaints in line with its current award limit of up [to] £430,000.’

• The PSR also specifically refers to the fact that reducing the maximum claim limit under its requirement is likely to increase the number of complaints made to the FOS as consumers look to recover that part of their scam losses that has not been reimbursed under the requirement. According to the data it has received, there were 393 scams between £85,000 and £415,000 sent by the largest 15 firms in 2023. The PSR points out that, while it’s unlikely all of those would result in FOS complaints, this is an indication of the potential increase in FOS referrals as compared to the number to be expected if the claim limit remained at £415,000. It even states that, given the gap between the proposed new limit under its policy and the FOS’ current award cap of £430,000, PSPs should inform victims of APP scams that, in addition to their right to seek reimbursement under the reimbursement rules, they have the right to bring complaints against sending and receiving PSPs if they are dissatisfied with their conduct and consider this has caused their loss. It acknowledges that these complaints may ultimately be referred to the FOS.
• Where PSPs have already communicated with their customers about their rights under the policy, the PSR does not expect them to necessarily retract or amend those communications at this stage. However, firms should provide up-to-date information to their consumers in any further communications with them. The PSR also states that PSPs should have plans in place to communicate any changes to the maximum level of reimbursement to their customers ‘as soon as practicable, and before any contractual changes come into effect’ – although it recognises that this may not be possible for all firms ahead of the policy start date. If it proceeds with the consultation proposal, it will also update its ‘APP scams reimbursement information on consumer communications for PSPs’.

What’s next?

• The consultation closes at 1pm on 18 September 2024. Given the tight timeframe, firms can either email comments to appscams@psr.org.uk or email to request a meeting to discuss their views instead of submitting a written response. 

• The PSR plans to publish a policy statement containing its decision on the implementation approach to the maximum level of reimbursement that will take effect from 7 October 2024 by close of business on 26 September 2024.
• The PSR will also shortly be publishing its policy statement confirming the CHAPS reimbursement requirement.

If you would like to discuss this latest PSR consultation or any other aspect of the new APP fraud reimbursement requirement, please get in touch with any of the people listed above or your usual Hogan Lovells contact.

Authored by Julie Patient and Virginia Montgomery.