Payment Fraud in 2024 and the Upcoming UK PSR Amendment

Payment is without a doubt a crucial link of trading activities for both FX brokers and traders. Data shows that global losses from payment fraud reached a staggering $48 billion in 2023, with projections suggesting this figure could rise to $362 billion by 2028. In response to increasingly sophisticated fraud schemes, exacerbated by advancements in artificial intelligence, the UK's Payment Systems Regulator (PSR) has introduced new regulations - the PSR Amendment - set to take effect on October 7, 2024.

PSR Amendment: Reshaping the Regulatory Landscape in the UK?

In a report released in 2023, the PSR highlighted the alarming rise of payment fraud, revealing that 14 banks reported a total of 385,964 fraudulent transactions in 2022, resulting in customer losses of £3.89 billion (approximately $5.13 billion). Victims received only £2.37 billion in compensation, accounting for just 60.63% of their losses. This discrepancy is largely due to varying compensation policies among financial institutions, where customers may only receive full compensation if specific criteria are met.

To address this issue, the PSR Amendment introduces significant changes to liability distribution, which are expected to have a profound impact on financial institutions, including brokers. The most contentious aspect of the amendment is the mandatory 50:50 liability split. Additionally, the amendment mandates enhanced transparency requirements for financial institutions to protect customers from fraud threats and expands name-checking services. These unprecedented measures signal a fundamental shift in the UK's approach to combating financial crime, likely triggering regulatory changes in other markets once the amendment takes effect.

Key Changes in the Amendment: Are Brokers Prepared?

Let's delve into the key changes introduced by the PSR Amendment: First, the scope covers mandatory compensation for financial institutions related to individuals, micro-businesses, and charity accounts. Compensation thresholds allow banks to voluntarily apply for up to £100 in excess payments, with a maximum compensation limit of £415,000. Traders must submit claims within 13 months of payment, and all participants in the Faster Payment scheme are included. The 50:50 liability split is also a key feature.

Details on how the 50:50 liability split will be implemented are still pending guidance from the PSR.

Global Market Reactions to the UK's New Payment Regulations

As mentioned earlier, the PSR Amendment is poised to change how global regulators and authorities address payment fraud and compensation / reimbursement, naturally prompting reactions across financial markets worldwide.

In the EU, while there is no report yet on the impact of mobile app fraud, European regulators have acknowledged shortcomings in existing PSD2 and 3DS regulations in mitigating app fraud. Consequently, the European Commission is working on legislation to combat app-based payment fraud, mirroring the UK's PSR compensation requirements.

In the US, Fazzaco recently reported that major banks, including Capital One and Citigroup, have adopted the FedNow real-time payment system​ promoted by the federal government. However, many US financial institutions express concerns that this could exacerbate app-related payment fraud. In a recent case, a federal court ruled that a receiving bank must compensate clients for losses due to its failure to act on alerts from its own AML software, setting a legal precedent that could aid future victims of payment fraud in obtaining compensation from financial institutions.