UK Regulator to Cut Fraud Reimbursement Cap for Banks

Consumer groups have strongly criticised the UK’s Payment Systems Regulator (PSR) after it announced plans to lower the maximum amount banks and payment companies are required to reimburse fraud victims. The move, which follows pressure from government ministers and fintech firms, has raised significant concerns about the potential impact on those affected by fraud.

Currently, under PSR guidelines, victims of financial scams can receive up to £415,000 in compensation. However, the regulator has announced plans to reduce this cap to £85,000—a substantial reduction—subject to a public consultation. The change is scheduled to take effect on 7th October 2024, despite the PSR previously acknowledging that such a low threshold would “exclude a significant number of victims.”

This decision comes as fraud, particularly Authorised Push Payment (APP) fraud, continues to rise across the UK. In 2023 alone, APP fraud accounted for £459.7 million of the total £2.3 billion lost to fraud. APP fraud occurs when individuals are tricked into transferring money to fraudsters, often through sophisticated impersonation or manipulation techniques.

Currently, banks and payment companies reimburse fraud victims on a voluntary basis, with widely varying rates of compensation. Some larger banks, such as Nationwide, refund nearly 100% of cases, while others, such as Danske Bank and digital bank Mozo, fully reimburse fewer than 10% of victims. The financial industry has long argued that the £415,000 compensation limit is too high, claiming it could encourage fraudsters to stage fake online transactions with accomplices to claim the maximum reimbursement and share the proceeds.

However, officials have highlighted that TSB has successfully offered a guarantee to reimburse customers up to £1 million in cases of payment fraud for the past five years, raising questions about whether the proposed lower cap is necessary.

Consumer advocates argue that the proposed £85,000 cap is insufficient to cover the significant financial losses that many victims experience. They warn that as fraud rates continue to rise, the lower limit could leave individuals and businesses vulnerable to financial hardship, particularly in high-value fraud cases. Rocio Concha, Which? Director of Policy and Advocacy, said: “It’s outrageous that the payments regulator is set to water down vital scam protections weeks before they were due to take effect and that this move follows months of lobbying from firms that refuse to take fraud seriously."

The PSR has defended its decision, stating that a balance must be struck between protecting consumers and ensuring the financial sustainability of banks and payment providers. The regulator claims that lowering the cap may encourage banks to invest more in fraud prevention measures rather than relying on large reimbursement payouts. However, critics remain sceptical, fearing that this decision shifts the responsibility onto consumers rather than financial institutions, which are better positioned to combat fraud.

Government ministers and fintech firms have also supported the change, advocating for a regulatory environment that promotes innovation and growth within the UK’s financial services sector. Some fintech companies argue that reducing the reimbursement cap will lower operational costs and improve competitiveness. However, consumer groups caution that prioritising innovation over consumer protection risks worsening the financial damage caused by fraud.