Who is responsible for reimbursing victims of APP fraud?

The scale of ‘authorised push payment’ (APP) fraud continues to rise and there is uncertainty as to who is responsible for reimbursing victims. Examples of scenarios where APP fraud can occur include impersonation, investment, romance, purchase, invoice and mandate, CEO fraud and advance fees. Liability may vary according to whether the payer is a consumer (or to be treated as one), as well as the type of institutions and payment services involved.

Regulatory developments

The Contingent Reimbursement Model (CRM) Code only covered 60% of APP fraud within its voluntary scope, so mandatory reimbursement requirements from the Payment Systems Regulator were required.

The new reimbursement requirement applies from 7 October 2024 to consumers, micro-enterprises and small charities, which are all treated as ‘consumers’ under the Payment Services Regulations 2017 (PSRs) and the CRM Code. However, the mandatory scheme only covers payments made using the Faster Payments Service (FPS) where the victim is deceived into allowing or authorising a payment from their account with a payment service provider (PSP) to another account outside the victim’s control at another PSP.

The affected PSPs must reimburse all in-scope customers who fall victim to APP fraud (with some exceptions), sharing the cost of reimbursing victims 50:50 between sending and receiving PSP, with extra protections for vulnerable customers.

As the operator of the FPS, Pay.UK is responsible for monitoring all directed PSPs’ compliance with the mandatory FPS reimbursement rules. Pay.UK will also operate a reimbursement claim management system (RCMS) that all members (direct participants) in Faster Payments must use from 1 May 2025. There will be various reporting standards mandated by the Payment Systems Regulator, with some limited to the larger participants. Affected PSPs must also explain this to their customers, including in service terms and conditions.

The Bank of England is also committed to achieving similar reimbursement for consumers making larger ‘CHAPS‘ transactions.

Liability outside the regulatory scheme

1. Breach of duties

As clarified by the Supreme Court in Philipp v Barclays:

• Banks have a duty to execute a valid (clear, lawful) payment order promptly.
• A bank cannot execute a payment outside its mandate, so cannot debit the relevant amount from the customer’s account in that case, and if it were to do so, then the customer has a debt claim against the bank.
• Banks have a duty of care to customers to interpret, ascertain and act in accordance with their customers’ instructions, which only arises where the validity or content of the customer’s instruction is unclear or leaves the bank with a choice about how to carry out the instruction. The duty won’t apply in the case of a valid payment order that is clear and leaves no room for interpretation or choice about what is required to execute it.
• Where the general duty of care arises, and the payment instruction was given by an agent of the customer, and a bank has reasonable grounds to believe that the payment instruction given by the agent is an attempt to defraud the customer, the Quincecare duty requires the bank to refrain from executing the payment pending its inquiries to verify that the instruction has actually been authorised by the principal/customer. A similar duty applies where the bank is on notice that the customer lacks mental capacity to handle their finances or bank accounts.
• The bank may also have a duty to take reasonable steps to recover funds that its customer claims to have paid away by mistake or as a result of fraud.

The PSRs require PSPs to “make reasonable efforts to recover the funds involved”, for which PSPs can charge any contractually agreed fee. Regulation 90 will enable liability to be imposed “where the payment order is executed subsequent to fraud or dishonesty” under the Payment Systems Regulator’s arrangements – but this does not provide a direct right of action for customers.

In Larsson v Revolut, it has been accepted that the above duties also apply to non-bank regulated PSPs (e-money institutions and payment institutions). However, the court held there were no duties owed by the payee’s PSP (‘receiving PSP’) to the payer, but did preserve the (slim) possibility of arguing ‘dishonest assistance in a breach of trust’ such that a constructive trust may have arisen over the proceeds of the payment transaction.

CPP v NatWest further considered the concept of a ‘retrieval duty’. That claim was held to be time-barred in the case of the PSP of the payer; but not in the case of the PSP of the payee, which might owe such a duty where:

• it assumed a responsibility to protect the payer from the fraud;
• it has done something which prevents another from protecting the payer from that danger;
• it has a special level of control over that source of danger; or
• its status creates an obligation to protect the payer from that danger.

2. Unjust enrichment

Terna v Revolut involves a claim by the payer that the receiving PSP was ‘unjustly enriched’ when the payer instructed its own bank/PSP to pay funds to a third-party account in the mistaken belief that it was paying a genuine invoice from an energy supplier. The payment went via a correspondent (intermediary) bank via a series of SWIFT inter-bank messages, and the funds disappeared from the third-party account within hours of being credited by the payee’s PSP (an e-money institution).

For this type of claim to succeed, the payee’s PSP must have benefited at the claimant’s expense in a way that was ‘unjust’ and without any defence.

When the payee’s PSP received funds in its account with a correspondent bank, it issued e-money to the payee, so claimed that it had not benefited. Established banking law holds that this is not a valid argument; and the court was not convinced that the position may be different with an e-money institution that must issue e-money on receipt of funds and safeguard the funds (which a bank does not have to do) because one safeguarding option involved investing the cash. Instead, the court held, these facts might operate as a defence, but that could only be decided on a full trial.

On whether the PSP was unjustly enriched ‘at the claimant’s expense’, the court held that SWIFT and CHAPS payments should be treated the same way; and these were potential instances of ‘indirect benefit’ rather than ‘direct benefit’ but the distinction did not matter, so long as there was agency and/or a ‘set of co-ordinated transactions’ (both applied here).The likely questions at trial, therefore, are whether the enrichment was ‘unjust’ and/or a defence applied.

The case will be heard before the Court of Appeal in due course.

3. Funds frozen or accounts suspended for regulatory reasons

In Kopp v HSBC, the payer’s bank suspended the payer’s account following an anti-money laundering review that the payer argued had been carried out, preventing the payer from making certain payments for which it then incurred liability to the payees under an indemnity, including ongoing interest.

On an interim summary judgment application, the court held there was a triable issue as to whether the bank’s liability clause (‘buried’ in the service terms) might fail to satisfy the reasonableness requirement under the Unfair Contract Terms Act (which also protects small businesses). The court also refrained from deciding whether the clause in question excluded these heads of liability on the basis that they were not “direct loss of profit” or “other direct losses” or were expressly excluded as being “indirect or consequential loss (including lost business, data, profits or losses resulting from third party claims) even if it was foreseeable”.

4. Failure to safeguard customer funds

The extension of bank duties and potential APP fraud liability to all types of regulated PSPs (accepted in Larsson) raises the prospect of the insolvency or a voluntary winding up of smaller e-money or payment institutions.

This is relatively rare, since PSPs are required to have a certain amount of minimum capital (both by regulation and, where applicable, card scheme rules) and to manage their working capital to remain a going concern, unless and until they are fully ‘wound-down’.

However, sudden, unexpected losses could conceivably arise, particularly where there is poor record-keeping or other problems, such as dissipation of assets or perhaps a sudden, significant ‘spike’ in APP fraud for which it is at least probable that the PSP might be liable (a matter for directors to consider in the exercise of their duties).

While the various court proceedings are proving somewhat helpful in revealing and resolving some of the uncertainty relating to where liability for APP fraud might sit, this is clearly a very slow and costly process.

If you need legal advice on APP fraud, please contact Simon Deane-Johns.