The UK’s £2.3 Billion Fraud Epidemic: Will New Reimbursement Rules Backfire?

The UK lost an estimated £2.3 billion to fraud in 2023 – a staggering 104% increase from 2022. Fraud can have a devastating impact on individuals, exacerbating disadvantage, vulnerability, and inequality. It also erodes trust in businesses and government programs, damaging the UK’s international and economic reputation.

Authorised Push Payment (APP) Fraud

APP fraud, the most common type of financial scam in the UK, uses social engineering tactics to trick individuals and businesses into sending money under false pretences. One common example is when fraudsters impersonate HMRC, threatening victims with bogus fines ahead of self-assessment deadlines. In 2023 alone, APP fraud cost the UK economy approximately £459 million.

Reimbursements for APP Fraud

In the past, a number of banks operated voluntary reimbursement schemes for APP fraud. More recently, in recognition of its prevalence, the Financial Services and Markets Bill 2023 established mandatory rules requiring banks and payment firms to reimburse victims for APP scams – with the costs shared among involved firms.

The new rules specifically addressed Faster Payments — a platform that has allowed fraudsters more time to move funds before transactions are flagged, making recovery more difficult. As such, Faster Payments has become the platform of choice for APP scammers. Despite presenting positive changes for victims, the implementation of these new rules is inevitably facing teething issues.

Unintended Consequences

Some have voiced concerns that criminals have already taken advantage of the voluntary reimbursement of APP fraud previously offered by banks. This might involve collusion between a criminal payer and payee, arranged solely to claim mandatory compensation from the banks involved.

Under the new rules, payment companies are now obligated to reimburse customers for fraud, with limited grounds for refusal. The primary exception is when victims fail to meet the ‘consumer standard of caution,’ meaning they are careless about paying unintended recipients. That said, large firms might compensate clients even where this is not met so as to avoid adverse publicity. This is something unlikely to be matched by smaller outfits – widening the gap between large and small payment firms in how they deal with fraud.

Lawyers have warned of the opportunities for organised crime: for example, large Ponzi schemes where dozens of individuals make payments. If a small payments firm was faced with 25 payments of up to £85,000 each, it may have to pay out up to £1m in mandatory compensation.

Balancing the Rights of Victims and Payment Firms

To address these concerns, the Payments Association have suggested introducing a £30,000 reimbursement cap and requiring a police report for larger payments before reimbursement decisions. This approach could help balance victim protection with minimising opportunities for fraudsters to game the system. It is claimed that this would encompass 95% of fraud cases.

It remains uncertain whether these measures will effectively deter organised crime, or if smaller caps will encourage a surge in false claims. Mandatory reimbursement, while well-intentioned, opens the door to a new form of profitable fraud. If unchecked, this could not only fail to address APP fraud but also overwhelm payment firms with fraudulent claims, ultimately increasing scrutiny on legitimate victims.

Striking the right balance is essential—ensuring victims of APP fraud are fairly compensated while maintaining a just reimbursement system that doesn’t incentivise criminal exploitation.

If you or your business has been affected by APP fraud, or if you are seeking legal guidance in navigating these new regulations, contact our team for expert counsel.

©Whitestone Chambers.

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