British banking institutions have been cautioned about a loophole in newly established fraud compensation regulations, which leaves victims unprotected if the fraudulent activity occurs between two customers of the same bank.
The Financial Conduct Authority (FCA), the City’s financial regulator, has alerted banking executives to the importance of adhering to regulations mandating that banks ensure favorable outcomes for customers when victims are excluded from protections that require financial firms to compensate losses of up to £85,000.
This warning follows the rollout of new regulations aimed at safeguarding victims of authorized push payment (APP) fraud, a type of scam that resulted in the theft of £214 million during the first half of 2024.
The FCA expressed concerns regarding cases where victims lack protection when fraudulent transactions occur between accounts within the same banking group, as these transactions can be processed through internal systems not subject to the new compensation regime.
The reimbursement system, governed by the Payment Systems Regulator, offers protection only for transfers that utilize external channels like the faster payments system (FPS) or the clearing house automated payment system (Chaps). However, internal book transfers or payments between accounts at the same bank do not fall under this protection.
In a letter to financial executives, the FCA stated that customers are “unlikely to understand” the reduced level of protection in cases involving these internal channels.
The correspondence noted, “We are therefore concerned that consumers will not grasp if they receive a diminished level of protection regarding an intra-firm payment versus a payment processed through FPS or Chaps, potentially leading to unfavorable customer outcomes.”
The regulator emphasized that banks are still obligated to ensure positive outcomes for victims lacking coverage under the new rules, as they are governed by separate regulations known as consumer duty. According to the FCA, any banking institutions providing lesser protection to these victims must justify their compliance with these obligations introduced in 2023.
The FCA added, “We will be monitoring data from the reimbursement system for consumer breaches and insufficient controls, ensuring that it effectively protects customers against APP fraud without negatively impacting the broader payments landscape.”
App fraud losses declined by 11 percent to £214 million in the first half of this year, as reported by UK Finance, an organization representing financial institutions. The total number of reported fraud cases dropped by 16 percent to 97,344, while the industry compensated victims with £126.7 million.
Ben Donaldson, managing director of economic crime at UK Finance, remarked that fraud “remains a significant threat in the country” and can inflict “serious psychological harm on victims.”
He stated, “This is not a battle we can win in isolation, as our data highlights that the majority of fraud originates from online and telecommunications avenues. Although some progress has been made in other sectors, their efforts have yet to fully address the scale of the issue — further actions are necessary to prevent fraudsters from exploiting these platforms and networks.”
“Earlier this month, new APP reimbursement guidelines were implemented for customers. While effective reimbursement is crucial in the fight against fraud, it should only be one part of a comprehensive solution.”