The Payment Systems Regulator (PSR) recently decided to reduce the maximum compensation limit for victims of payment fraud from £415,000 to £85,000, sparking significant controversy and criticism.
The Payment Systems Regulator (PSR) recently decided to reduce the maximum compensation limit for victims of payment fraud from £415,000 to £85,000, sparking significant controversy and criticism. Announced on 5 September 2024, this change has drawn reactions from consumer advocates, financial institutions, and policymakers.
To understand this change let’s look at the evolution of the PSR’s approach to Authorised Push Payment (APP) fraud since it published its first regulatory framework on the matter.
Initially, in June 2023, the PSR introduced a framework to standardise how financial institutions handle refunds for victims tricked into authorising payments to fraudsters, proposing a compensation cap of £415,000. However, after a review, this cap was revised down to £85,000. This cap aimed to balance consumer protection and financial stability, preventing potential instability from excessive claims while addressing most cases.
The June 2023 policy outlined banks’ responsibilities, requiring them to assess their compliance with fraud prevention measures and determine their liability for reimbursing victims based on specific criteria. The policy stressed the need for robust fraud prevention, mandating banks to implement effective fraud detection systems. The PSR committed to overseeing compliance, including reviewing complaints and ensuring adherence to the new guidelines.
In December 2023, the PSR refined the reimbursement framework to enhance clarity and effectiveness. While the £85,000 cap was retained, concerns about its adequacy for high-value fraud cases continued. The December update introduced stricter requirements for banks to improve their fraud prevention and detection measures. Also, the PSR’s oversight role was emphasised further, focusing on ensuring banks’ adherence to the new criteria and monitoring their responses to scam reimbursements. Finally, the policy highlighted the importance of collaboration among financial institutions and stakeholders to improve fraud prevention through technology, education, and consumer awareness.
In September 2024 the PSR published a consultation paper, which proposed increasing the reimbursement cap for Faster Payments fraud. The consultation recognised concerns about the adequacy of the existing £85,000 limit, particularly for higher-value frauds. The proposed increase aimed to provide better coverage for victims and reduce the financial impact of fraud on individuals. This proposal sought to balance enhanced consumer protection with the need to maintain financial stability, aiming to find a compromise that would ensure adequate compensation without imposing excessive burdens on banks. The consultation also emphasised the need for banks to enhance their fraud prevention systems and meet updated obligations for victim reimbursement. The PSR planned to continue its oversight role to ensure compliance with the new policies.
However, on 5 September 2024, the PSR made the controversial decision to reduce the compensation limit from £415,000 to £85,000. This move was justified by the PSR as a practical adjustment to avoid potential system abuse, citing new research that £85,000 would cover over 99% of fraud cases by volume. Yet, this decision has been met with widespread criticism. Consumer groups, such as Which?, have condemned the move as “outrageous,” arguing that it disproportionately impacts victims of high-value scams, such as investment fraud and house purchase fraud. These groups warn that the reduction could leave many individuals in severe financial hardship.
The legal arguments surrounding this decision revolve around five main arguments.
Firstly, around the balance between consumer protection and financial stability. The initial justification for the £85,000 cap was to balance these two needs. Supporters argued that it prevented potential instability from excessive claims, while critics questioned its fairness for high-value fraud victims. The recent decision has intensified these debates, raising questions about whether the cap adequately protects all victims, particularly those facing substantial losses, while maintaining financial sector stability.
Secondly, around the need for fairness and adequacy. The fairness of the £85,000 cap has been debated throughout the evolution of the policy. Critics have argued that it might not fully address significant losses, and the recent decision has heightened these concerns, with calls for adjustments to better cover high-value cases.
Thirdly, around bank liability, accountability, and fraud prevention.
On liability banks were initially required to meet specific criteria for fraud prevention and victim compensation, with debates focusing on whether these criteria were sufficient. The September 2024 consultation reinforced the need for banks to enhance their fraud prevention systems and meet updated obligations, but the reduction in compensation limits raises questions about whether these measures are sufficient.
On accountability calls have been made for greater transparency in the PSR’s decision-making and criteria for assessing bank liability. The PSR has been urged to provide clear guidelines and effective enforcement to ensure the new cap is implemented consistently and fairly. The recent decision has amplified demands for detailed explanations and transparency.
On fraud prevention the PSR policy has consistently emphasised the need for improved fraud prevention measures. The proposed increase in the reimbursement cap was intended to incentivise banks to enhance their fraud prevention efforts. However, the recent cap reduction raises concerns about the effectiveness of these measures and banks have repeatedly highlighted the need for individuals to take some responsibility for their actions – for example in the increasingly frequent cases of 'authorised push payments', where an individual deliberately makes a payment to an account, having been convinced by a fraudster to do so, sometimes in defiance of attempts by their bank to protect them.
The PSR’s decision to reduce the compensation limit to £85,000 represents a contentious shift in the regulatory landscape. This move underscores the complex interplay between consumer protection, financial stability, personal responsibility and corporate governance. As the new regime comes into effect on 7 October 2024, the impact on fraud victims and the potential need for further reforms will be closely monitored. The evolving legal and policy debates highlight the challenges of balancing effective consumer protection with the operational needs of financial institutions.
