Written by Kerri Wilson, Senior Associate in the London office of Ontier LLP
With the advent of real-time payment schemes, such as Faster Payments in the UK, Authorised Push Payment fraud is on the rise having a devastating impact on victims. Authorised push payment fraud, also known as APP fraud, takes place where a victim is induced by a fraudster to authorise their bank to transfer funds to the fraudster’s bank account.
In its Annual Fraud Report released earlier this year, UK Finance estimated that APP fraud losses reached £485.2million last year.
Often the fraud is when someone poses as an investment service provider, financial advisor or fund manager to convince an individual, institution or corporation to transfer large sums of money into a company or investment opportunity that does not exist.
Unlike “pull” frauds, where the fraudsters take funds from an unsuspecting victim’s bank account, APP fraud involves the deception of the victim, who authorises his or her bank to transfer funds to an account controlled by the fraudster.
Important case clarifying bank duty
This is what happened to Mrs Fiona Philipp in 2018. She fell victim to fraudsters posing as an operative working for the FCA and NCA and instructed Barclays to transfer the sizeable sum of £700,000 from her current account. Realising the problem, Mrs Philipp then unsuccessfully tried to recall the funds transferred. She subsequently bought a claim again Barclays alleging it owed her a duty to observe reasonable care and skill when executing her instructions.
In a much-anticipated judgment this week in Philipp v Barclays Bank UK PLC, the UK Supreme Court upheld Barclays position confirming that a bank’s Quincecare duty, as set out in Barclays Bank PLC v Quincecare Ltd [1992], owed towards its customers does not extend to an individual customer who has given a bank a valid payment instruction, even if it is the result of a fraud. The decision is said to have left banks sighing with relief and be a blow for the victims of fraud clarifying as it does that banks cannot be held responsible for fraudulent payments authorised by customers themselves.
Not all is lost – or so it seems
However, it is not necessarily game over for victims. The court is still to pass a ruling on whether a bank in failing to act promptly, when requested to recall funds once a fraud has been detected, would be liable for a victim’s loss.
There are also legislative moves afoot.
Whether or not a victim of APP fraud should bear any loss arising out of this fraud or whether the bank who made or received the payment should reimburse a victim has, for some time now, been a question of social policy for regulators. In 2019, a voluntary code for reimbursement of victims was developed which ten banks and other payment services providers (PSPs) signed up to. Despite the code, many victims struggle to get their money back from the banks.
So the Government has stepped in. In The Financial Services and Markets Act 2023 (“FSMA 23”), which received Royal Assent last month, provision has been made for a mandatory reimbursement scheme which will require banks and payment companies to reimburse the victims of such fraud.
In section 72 of FSMA 23 it says the Payment Systems Regulator must prepare and publish a draft of a relevant requirement for reimbursement in qualifying cases of payment orders as the Regulator considers should be eligible for reimbursement. A case is a “qualifying case” for the purposes of this section if –
1. the case relates to a payment order executed over the Faster Payments Scheme, and
2. the payment order was executed subsequent to fraud or dishonesty.
Will proposed scheme be enough to protect investors?
On the face of it, the scheme will assist investors falling victim to fraud. However, at this stage, reimbursement will only be possible if funds have been transferred to a fraudster’s account via the Faster Payments Scheme. At present all other payment systems, including cheques, BACS, CHAPS, Mastercard and Visa, are not covered by the reimbursement scheme possibly because for these systems there is slight delay between instructing payment and funds ultimately being transferred into the fraudsters account. That said, we would expect the Regulator to extend the reimbursement rules to these payment systems once the first scheme has been put in place.
