The British regulators are on the verge of drastically relaxing a planned regulation that was supposed to require banks and payment companies to compensate fraud victims with up to £415,000. According to people familiar with the plan, the new compensation limit is now set to be just £85,000, following concerns that the originally higher limit could make the system susceptible to abuse and bankrupt smaller fintech companies.
The decision comes after intensive lobbying by the financial industry and the ministries, which saw the new system as a potential threat to the financial sector. Consumer organizations, on the other hand, emphasized that the high compensation limits would represent a necessary protection for victims of fraud.
The Payment Systems Regulator (PSR), which is responsible for overseeing payment systems in the UK, is planning a consultation on this new limit. An official announcement is expected later this week. The regulator also aims to publish the results of their investigation, which should show how many recent fraud cases are connected to transactions over £85,000. A comment on whether the original limit of £415,000 will be reduced has so far been declined by the PSR.
In 2023, British consumers lost a total of £459.7 million to "Authorised Push Payment" (APP) fraud, where victims are tricked into transferring money directly to fraudsters posing as legitimate recipients. Refunds of these amounts are currently made on a voluntary basis, with some banks fully reimbursing almost all cases, while others cover less than 10 percent of reported fraud cases.
Tulip Siddiq, the responsible minister for the financial sector, expressed concerns about the impact of the new system on the industry, while her conservative predecessor Bim Afolami pointed to 'significant issues' with the proposed regime.
The financial industry has long argued that the originally proposed limit of £415,000 is too high and could encourage potential fraudsters to stage fake online transactions with an accomplice to cash in on maximum compensations from payment providers. On the other hand, authorities pointed out that the TSB Bank has been offering its customers a refund guarantee of up to £1 million for fraud cases for the past five years.
A reduction of the limit to £85,000 would align the maximum protection amount with the Financial Services Compensation Scheme, which insures deposits in case a bank becomes insolvent. However, there are concerns within the industry that even a reduced limit could expose financial companies to unlimited liability in the event of multiple fraud cases.
Last month, the PSR found that there are significant differences among British banks in reimbursing fraud cases. Some major banks like Nationwide and TSB refunded over 95 percent of lost amounts in full, while others, including digital bank Monzo, Danske Bank, and AIB, issued full refunds in less than 10 percent of reported APP fraud cases.
Rocio Concha, a director at the consumer organization Which?, sharply criticized the current system: "Fraud victims are being severely let down by the current reimbursement system, with significantly different outcomes depending on which bank they have their account with.
