The media reports that currently in the United Kingdom, the local payment regulator is abruptly cutting its compensation plan for victims of fraud.
The original version of the rules for providing compensation to UK citizens who encountered criminals in the finance area was provided. that the banks of this country and companies operating in the sphere of providing payment services must pay customers who have lost money as a result of illegal manipulation up to 415,000 pounds sterling ($544,000). The new configuration of the relevant rules, as reported by the media, referring to insiders who are aware of the intentions of the regulator, which have not yet been publicly stated, suggests that the number of payments to victims of fraud should not exceed 85,000 pounds. For banks and companies providing payment services, this news is positive.
It is worth noting that compensation for victims of fraud has become a topic of discussion in the United Kingdom. Representatives of the banking sector have repeatedly stated that the appropriate approach does not take into account many nuances and imposes excessive responsibilities on financial institutions. Also in the context of this discussion, the point of view was declared that the rules proposed by the regulator may pose a threat to the continued existence of small banks and fintech companies belonging to the category of small and medium-sized businesses. Such functional structures can potentially go bankrupt by paying compensation. Also, in this case, the factor of limited financial capabilities should be taken into account, which will not allow small banks and fintech companies of the appropriate scale to develop their advanced anti-fraud systems or pay for access to similar third-party platforms. Moreover, there is a circulating point of view according to which compensation as a kind of guarantee of protection of funds can potentially reduce the level of attentiveness and caution on the part of consumers. Clients of banks and financial companies may begin to assess the possible consequences of their actions with money less carefully and meticulously against the background of the existence of a reimbursement mechanism.
The UK payments sector and the local banking industry put pressure on the Payment Systems Regulator (PSR) to scale back the reimbursement plan, which was due to take effect on October 7. The media reports that consultations on a new compensation limit will be announced this week. It is worth noting that the relevant information has not yet been officially confirmed. At the same time, the probability that the regulator has nevertheless listened to the opinion of the banking sector and the payment industry is not minimal.
The media also report that PSR will publish information on how many cases of fraud with individual payment transactions have recently been recorded as part of the practice of performing financial operations for more than 85,000 pounds. The regulator has so far refused to comment on insider information about the likely reduction of the proposed threshold of reimbursement by banks and fintech companies from the initial level of 415,000 pounds.
A spokesperson for the PSR told reporters that answers to questions about the mentioned practice will be provided after the regulator publishes its findings on the relevant topic.
PSR had called to implement a reimbursement plan after a sharp increase in authorized push payment (APP) fraud was recorded. In this case, it implies a criminal practice in which fraudsters fraudulently force victims to transfer money from their bank accounts. In the course of the corresponding algorithm of actions, the criminal pretends to be the rightful recipient of the payment transaction.
In August, PSR published statistical information according to which last year in the United Kingdom, as a result of fraudsters applying the specified algorithm, residents of the country lost money totaling $433 million. It is worth noting that this indicator is 12% lower than the figure that was recorded in 2022.
Industry groups such as the Payments Association have lobbied to hold off new rules for a kind of material response by banks and fintech companies to fraud faced by their customers.
It is worth noting that in some situations, excessive credulity or even naivety of a single person as a threat factor can surpass advanced systems for countering criminal encroachments in the financial environment. Some people, contrary to numerous warnings, commit potentially dangerous actions with their money, even knowing about the risks. In the context of such problems, one of the most likely tools to improve security is to improve literacy regarding awareness of the concepts and strategies used by fraudsters to commit crimes.
Riccardo Tordera-Ricchi, head of policy and government relations at the Payments Association, said in June that in the United Kingdom, prudential risk and requirements for participation in the local payment market will increase significantly if planned changes to the practice of reimbursement from damage caused to victims of APP transaction fraud are implemented in according to the plan. He also stated that the cost and friction of real-time payment financial operations will grow in this case. Moreover, in his opinion, there is a threat of decreasing the volume of investment in the fintech market of the United Kingdom. Riccardo Tordera-Ricchi says that the reasons for this potential scenario are factors such as a decline in profitability and an increase in failure risks.
It is worth noting that as recently as last month, PSR demonstrated a steady determination to implement its plan regarding reimbursement for fraudulent activities. What caused the change in the regulator’s position, which the media reported with reference to insiders, is still unknown. It is possible that the PSR has studied in more detail all the possible risks and negative consequences of the proposed measures, including the financial burden that may become an insurmountable obstacle for some banks and fintech companies to continue to exist.
Kate Fitzgerald, head of policy at PSR, said in August during a conversation with media representatives that the regulator had been consulting with the industry for more than two years about the proposed measures and was still continuing relevant activities. Also in this context, it was noted that the purpose of the consultations is to provide conditions for the timely and effective implementation of the reimbursement mechanism.
Dan McLoughlin, Fraud and Security Specialist at Lynx, in a comment to the media, stated his disappointment about the new decision of the regulator, which was reported by journalists, referring to insiders. According to the expert, a sharp decrease in the amount of reimbursement deprives banks of financial motivation to prevent fraud. It is worth noting that this statement has two counterarguments. Banks may face significant financial difficulties paying out reimbursements, the number of which may reach a critical point in terms of the respective capabilities of lenders. Also, the large amount of corresponding payments deprives customers of banks and fintech companies of motivation to be careful when making transactions.
Dan McLoughlin says that most cases of fraud with APP-financial operations will be subject to the rules of procedure provided for by the regulator, and underlines that the decreased compensation limit shows the unwillingness of lenders to take responsibility and make tough decisions. According to the expert, against the background of softening requirements from the PSR, banks are losing the desire to invest in reliable fraud detection and prevention systems that ultimately protect consumers.
It is worth noting that recently the problem of fraud has become more relevant. This state of affairs is the result of the fact that criminals use advanced technologies, including artificial intelligence, as part of their activities. Due to the relevant practice, fraudulent algorithms have become more sophisticated. In the context of this challenge, personal awareness of potential threats is important. For example, a query in an Internet search engine, such as how to know if my camera is hacked, will allow anyone to get information about signs of unauthorized access to the device. Digital literacy is an effective tool for countering cybercrime, which also extends to the financial industry and is a source of significant damage, which is recorded annually.
