pay.uk call for information · crm fee. b. consumer benefits. we would like your views on whether...
TRANSCRIPT
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Pay.UK Call for Information: A proposal by seven Participants to
introduce a Faster Payments Service (FPS)
rule requiring the payment of a Contingent
Reimbursement Model (CRM) Fee August 2019
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Pay.UK Annex A – Supporting Discussion ............................................... 19
5 Next Steps .......................................................................................... 18
4 Our Questions .................................................................................... 14
3 The Proposed Change ........................................................................ 11
2 Background.......................................................................................... 8
1 Introduction......................................................................................... 6
Executive Summary .................................................................................. 3
Contents
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Executive Summary This document is a Call for Information. Pay.UK wants to obtain insight from stakeholders on a
change request that has been made by UK Finance on behalf of seven FPS Direct Participants.
The change request proposes the introduction of a new FPS Payment System Rules (”FPS Rules”) with the aim of supporting delivery of part of a voluntary mechanism that has been developed to help deal with instances of Authorised Push Payment (APP) Scams.
Context
APP Scams are a crime which can have a devastating impact on their victims. In light of this, over recent years there has been significant work undertaken with the aim of driving down instances of this crime and looking at how customers can be reimbursed if they do fall victim to an APP Scam.
This work has involved collaboration between a wide range of stakeholders, including: Payment Service Providers (PSPs); consumer advocates; UK Finance; the Government; and regulators. A key
initiative has been the establishment of the Contingent Reimbursement Model Code for Authorised Push Payment Scams (“the Code”)1 - following work by the APP Scams Steering Group.
The development of Confirmation of Payee (“CoP”), as recommended by the Payments Strategy Forum, is also seen as a helpful tool to support the objectives of the code.
Maintaining trust in the certainty, integrity and security of our payments services for the benefit of
end users goes to the heart of what Pay.UK does. This is why we support the aims of the Code and
welcome the significant efforts of all involved in establishing it, and why we have taken forward
work to support the development and delivery of CoP.
The Change Request
On 26 July, Pay.UK received a change request from UK Finance on behalf of seven Faster Payment
Service (FPS) Direct Participants: Barclays; HSBC; Lloyds Banking Group; Metro Bank; Nationwide; RBS; and Santander (this is referred to as “the Change Request”). The Change Request proposes introducing a requirement into the FPS Rules for Participants to pay a CRM Fee. The CRM Fee would fund the reimbursement of all customers who fall within the category of ‘no blame’ as per
the assessments outlined within the Code.
Under our rules, changes to the FPS rules can be proposed by any FPS Participant and we are now undertaking work to support the Pay.UK Board in determining whether or not to adopt the proposal set out in the Change Request. Our rules and regulatory requirements require that we
consider the views of all relevant service users. To support this, we are seeking views from stakeholders through this Call for Information.
Our Call for Information
In order to support our assessment of the proposal made in the Change Request, we want to obtain insights and information from those stakeholders who would be affected by the change.
1 See: https://www.lendingstandardsboard.org.uk/wp-content/uploads/2019/05/CRM-code.pdf
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We want to know your views on the proposed rule change and we’re seeking evidence as to the
impact of the change for your business and the wider sector.
To help understand your views we’ve asked a number of questions about the proposal. We have gathered our questions into five groups which are explained below.
A. The use of the FPS Rules to support implementation of a voluntary industry initiative. We
want to understand views on using an FPS rule to provide a funding mechanism for the Code. We also want to get the perspective of the different PSPs who would be required to pay the
CRM Fee.
B. Consumer benefits. We would like your views on whether the FPS rule change would support
improved consumer outcomes and whether it would incentivise the industry to take steps to reduce APP fraud overall.
C. Competitive effects. We want to understand any views you have on how the proposed rule
change would have an impact on competition. This includes questions exploring whether the proposed CRM Fee, and corresponding risk sharing provided by the access to the no blame fund, would influence your use of FPS or affect your business model.
A concern we have identified in this area is on the proposed use of monies raised from FPS
users to cover the cost of APP Scams associated with other payment types (CHAPS and “on-us”
transactions). We include some specific questions on this point in the paper.
D. The proportionality of the proposal for different groups of service-users. The change
request includes a series of exemptions from the requirement to fund the no blame fund. We
want to understand your views on the principle of including exemptions, any specific views you have on the five exemptions proposed and whether there are any exemptions that you
think are missing.
E. The practicalities of the proposal from an implementation and operational perspective.
We want to understand any operational implications for your business and get your perspective on the proposals made for dealing with non-compliance with the rule.
We have set out our full list of questions in chapter 4 of the paper. To support your consideration of each group of questions we have also provided an accompanying discussion of the proposal at
the Annex to this paper.
Next Steps
Please provide your completed response to the Call for Information by 5pm on Tuesday 1 October
2019. You should send your response to [email protected]. Pay.UK will use the responses and evidence provided, as well as any further economic and legal analysis that we undertake, to support our assessment of the Change Request.
The Pay.UK Board, as an independent Board, shall then decide in its absolute discretion whether
and when any consequent changes would become effective.
We will aim to publish a decision on this Change Request by the end of November 2019. The decision document will set out reasons for our decision and will be made available on our website.
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The outcome of this consultation could be either the acceptance, or rejection, of the proposed
change request. Because the outcome of this consultation is uncertain, UK Finance is coordinating work by the industry to explore various contingency options that could be
implemented in event that the change request is not adopted. Pay.UK welcomes the effort that is being made to complete this work. It is pragmatic to provide this contingency, but also
demonstrates the continued commitment of the payments industry to work together to tackle APP scams. To find out more about contingency funding, please email:
We look forward to hearing your views on the proposal through this Call for Information and
playing our role in supporting the payments industry in finding an appropriate way forward to deal with this significant and critical issue for consumers.
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1 Introduction
Purpose
On 26 July, Pay.UK received a change request from UK Finance on behalf of seven Faster Payments
Service (FPS) Direct Participants: Barclays; HSBC; Lloyds Banking Group; Metro Bank; Nationwide; RBS; and Santander (this is referred to as “the Change Request”). The Change Request, which can be found at this link, proposes to introduce a new rule into the FPS Payment System Rules (“FPS Rules”) and would also require consequent amendments to the existing FPS participation
and related agreements. UK Finance describes the requirement for the new rule as follows:
“We are requesting a rule change to enable a volume-based fee per FPS transaction, subject to certain exemptions, on defined FPS payment types. The CRM Fee will fund, on a sustainable basis, the reimbursement of all customers who fall within the category of ‘no
blame’ as per the assessments outlined within the Contingent Reimbursement Model Code”.
The purpose of the proposed rule change would be to support delivery of part of a voluntary mechanism that has been developed by the industry to help deal with instances of Authorised
Push Payment (APP) Fraud. UK Finance explains the justification for the rule change as:
“The CRM Fee is of critical importance to the setting up of the new ‘no blame’ fund which will promote good and consistent customer outcomes for ‘no blame’ victims of APP fraud,
support the functioning of the Code and thereby benefit the payments industry whose
customers may become victims of APP fraud”.
In order for Pay.UK to consider this proposal, we want to obtain insights and information from those stakeholders who would be affected by the change. This document is our Call for
Information. We want to know your views on the proposed rule change and we’re seeking
evidence as to the impact of the change for your business and the wider sector. Our Call for Information paper is set out as follows:
Chapter 2 provides background information. We explain the role of Pay.UK, the history of the development of the Change Request and the process we are following to assess the
merits of the proposal.
Chapter 3 provides a summary of the proposal that has been provided by UK Finance, although respondents to the Call for Information will need to fully familiarise themselves with the UK Finance Change Request and supporting documents – which are provided as
an annex to this paper.
Chapter 4 sets out the questions we want your views on to support our assessment of the proposed rule change. We will use your responses and the evidence you provide to support our consideration of this proposal.
Chapter 5 explains our next steps on this work including details of an event that UK Finance is hosting on 9 September. It also highlights some work that UK Finance is undertaking in parallel to this Call for Information investigating alternative mechanisms to provide funding for the no-blame fund.
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Who is this document for?
This technical proposal relates to a possible mandatory mechanism to implement an element of a
far broader programme of public policy work which has been considering the best way to tackle
APP fraud (see background chapter for more information). As such the scope of this Call for Information is narrow – we are looking solely at the implications of the UK Finance proposal to change the FPS Rules and not at other aspects of APP fraud which have been or are being
considered separately by other parties. Because of this, we expect that this Call for Information will be primarily of interest to direct, indirect and potentially future participants in the FPS
payment system, as well as trade bodies representing those parties and our regulators. We note that UK Finance is undertaking work in parallel to this Call for Information looking at
possible alternative mechanisms to ensure customer are repaid in the no blame scenario. Should we receive responses to this Call for Information relating to the merits of such alternatives model we will pass these comments on to UK Finance for its consideration.
Responding to the Call for Information
We’ve set out a number of questions in this document on which we are seeking your views. A response template is provided alongside this paper. We would appreciate it if you would use this
template to respond to the Call for Information.
Please provide your completed response to the Call for Information by 5pm on Tuesday 1 October 2019 . You should send your response as a Word document to [email protected].
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2 Background
Pay.UK and the Faster Payments Service
The Faster Payments Service payment system (“FPS”) is a Financial Markets Infrastructure (“FMI”) providing UK bank, building society and non-bank payment service providers’ customers with the
ability to make real time, 24×7, account-to-account funds transfers. Over 400 financial institutions offer the FPS, making it available to the vast majority of current account holders in the UK.
FPS is operated by Pay.UK Limited (“Pay.UK”). Pay.UK was formed in July 2017 (initially under the
name New Payment System Operator or NPSO) under the supervision of the Bank of England and the regulation of the Payment Systems Regulator. From May 2018, Pay.UK became the operator of
the FPS payment system. As well as operating FPS, Pay.UK operates the Bacs and cheques payment systems and provides a range of other robust, resilient, and collaborative retail payments services that are secure, open and foster innovation.
FPS is governed by payment system rules (the FPS Payment System Rules or “FPS Rules”). These
rules must be complied with by the FPS Direct Participants (namely, the banks, building societies
and other Payment Service Providers (PSPs) which connect to the FPS system infrastructure). Under the payment system rules, FPS Direct Participants may propose changes to the rules – in
this case UK Finance has made a Change Request on behalf of the following seven FPS Direct
Participants: Barclays; HSBC; Lloyds Banking Group; Metro Bank; Nationwide; RBS; and Santander.
APP Scams and the APP CRM Code
APPs are made when people request that their PSP make a payment from their account to another account.
Scams involving APPs occur when consumers are tricked into authorising a payment to an account
that they believe belongs to a legitimate payee – but is in fact controlled by a scammer. Payments related to APP scams can be made over the phone, online, or in person, and most are completed instantly.
At the end of 2016, the Payment Systems Regulator (“PSR”) investigated a super complaint made by the consumer group Which?. The super complaint and the PSR’s work ultimately led to the creation of a steering group to develop a contingent reimbursement model. The APP Scams
Steering Group was established by the PSR in February 2018 to lead the development of an
industry code for the reimbursement of victims of authorised push payment scams2. The steering group included PSP and consumer representatives.
2 For more information see: https://www.lendingstandardsboard.org.uk/contingent-reimbursement-model-
code/
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Following the work of the APP Scams Steering Group, a new voluntary Code on APP scams (“the
Code”) was launched on 28 May 2019. The APP Scams Steering Group explains that3:
“The new voluntary Code sets out increased consumer protection standards which will help
reduce the occurrence of APP scams. To help protect customers, payment service providers
that have signed up to the Code commit to:
protect their customers with procedures to detect, prevent and respond to APP scams,
providing a greater level of protection for customers considered to be vulnerable to this
type of fraud; and
greater prevention of accounts being used to launder the proceeds of APP scams,
including procedures to prevent, detect and respond to the receipt of funds from this
type of fraud”.
The APP CRM Code applies to Authorised Push Payment scams, that is, a transfer of funds executed across FPS, CHAPS or as an internal book transfer (i.e. where the sending and receiving PSPs are the same).
No blame funding
At the time that the voluntary Code was launched a group of banks and building societies put in place interim funding to support provision of the “no blame fund”. This is the money that
provides reimbursement for the customers of Code signatories in the case that both the customer and their PSP have met the requisite level of care required by the voluntary Code. UK Finance
explains that4:
“To fund this compensation to victims, as an interim arrangement a number of the launch
signatories of the Code have established a fund to provide reimbursements from
implementation until a new long-term funding arrangement is in place no later than the end
of this year”.
One way seven PSPs have proposed to provide this long-term funding is through the proposed change to the FPS Rules, which is set out in UK Finance Change Request and that we are calling for information on through this paper. In addition to this proposal, UK Finance is taking forward separate work to consider the merit of alternative mechanisms to provide the no-blame funding
on an enduring basis. To find out more about this work please see the next steps section of this paper in Chapter 5.
3 Exert from APP Scams Steering Group Press release. 28 May 2019. 4 Exert from UK Finance response to the publication of the APP Scams Voluntary Code. See:
https://www.ukfinance.org.uk/press/press-releases/uk-finance-responds-launch-authorised-push-
payments-scams-voluntary-code
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Our process to assess the Change Request
Under our rules, changes to the FPS rules can be proposed by any FPS Participant and we are now
undertaking work to support the Pay.UK Board in determining whether or not to adopt the
proposal set out in the Change Request. Our rules and regulatory requirements require that we
consider the views of all relevant service users.
Rule 10 of the FPS Payment System Rules (‘FPS Rules’) contains the high level process that must
be followed to make a change to the FPS Rules. This is summarised below:
1. Any FPS Participant or the Pay.UK Board may propose changes to the FPS Rules by
submitting proposals in writing to the Pay.UK Board.
2. Pay.UK will then consult as appropriate with all relevant:
a. FPS Participants, in this case direct and indirect FPS participants on both the
proposal and form of the Rule drafting which may require several rounds of
consultation depending on the request5;
b. other relevant external stakeholders, such as for example in this scenario, UK
Finance, service users and Pay.UK regulators;
c. the appropriate Pay.UK Board Committee(s), to ensure Pay.UK is following
appropriate internal governance in line with Pay.UK’s risk appetite, strategic
objectives, regulatory requirements and priorities, as well as within the FPS Rules
and Agreements.
3. The Pay.UK Board, as an independent Board, shall then decide in its absolute discretion
whether and when those consequent changes shall become effective.
In this instance, we are first calling for information to enable us to assess UK Finance’s proposed
Change Request in light of stakeholder feedback.
5 Please note that an FPS Rule change alone may not be sufficient to give effect to and implement the
Change Request as drafted (for example to adequately address data privacy obligations and the
transactional data that would need to be processed under the current proposal), in which case the FPS
Participation Agreement(s) would also require amendments. Any changes to the FPS Rules and FPS
Participation Agreement(s) would need to be consulted on with the FPS Direct Participant.
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3 The Proposed Change
The Change Request
UK Finance, on behalf of seven FPS Direct Participants, has provided us with a Change Request document (the “Change Request”) setting out the detail of its proposal. It has supported the
Change Request with seven annexes. UK Finance has confirmed that it is acting on behalf of the seven Direct Participants who have signed off the Change Request for submission to Pay.UK (FPS Rule 10 requires the Change Request to be submitted by FPS Participants) and have confirmed
that the Change Request and supporting annexes - which can be found at this link - may be
published on our website.
The UK Finance change request documents are as follows (they are contained in a single PDF):
UK Finance paper – The proposed Change Request
Annex 1 – Terms of reference APP scams steering group
Annex 2 – Decision process and evidence
Annex 3 – Roles and responsibilities (long term ‘no blame’ fund)
Annex 4 – Stakeholder engagement
Annex 5 – Exemptions and their justification
Annex 6 – FPS CRM Fee Governance Group
Annex 7 – Customer journey
We strongly recommend that any person responding to this Call for Information reads and
considers the entirety of UK Finance’s proposal. To help facilitate that reading, we provide
below a summary of the UK Finance proposal. This summary has been agreed as accurate by UK
Finance.
We note that when it described the FPS Participants that would be subject to the proposed rule change, the UK Finance Change Request refers to “Direct Participant, DCNSP and DA (Direct
Agency)”. We understand this to include the following categories of FPS Participants (as defined in FPS Rule 1.1), which we are collectively calling “FPS Direct Participants” for convenience in this
Call for Information:
DCS Participants (Directly Connected Settling Participants, whether Bank or Non-Bank);
DCNSP Participants (Directly Connected Non-Settling Participants that are sponsored by a Bank DCS Participant); and
Direct Agency (a PSP which is not a DCS or DCNSP Participant, and is not a FIM-only agency
or corporate, but which is connected to the FPS central infrastructure and is sponsored by
a Bank DCS Participant).
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Summary of the effect of the arrangement proposed by the UK
Finance
Basic mechanism
All FPS Direct Participants would be required by a FPS Rule to pay a Contingent Reimbursement Model (CRM) Fee, subject to certain exemptions (which are explained
below).
The CRM fees would be held in a ‘No Blame Fund Trust’, which would be administered by a Fund Administrator (appointed by UK Finance).
The level of the fee would be determined by the necessary size of the no blame fund and
the volume of qualifying transactions. The fee would be set on a yearly basis by the Fund
Administrator, with 4-8 weeks’ notice being provided before changes to the CRM Fee were implemented.
The FPS Direct Participants would be required to pay this fee for all qualifying
transactions. If the FPS Direct Participant is a sponsor PSP, it would need to make a
commercial decision about whether and - if so – how, to pass the cost of the CRM fee on to its customers (i.e. its indirect participants). Similarly, UK Finance proposes that the decision on whether or not exemptions would be passed on to indirect participants would
be a commercial decision for the sponsor PSPs.
If the requested FPS Rule was put in place, all customers would be able to access the no blame fund via their PSP – regardless of whether or not their PSP was a signatory to the
voluntary APP CRM Code. However, the customer journey would be different dependent
on whether or not the customer’s PSP was a Code signatory (see UK Finance Annex 7).
The UK Finance proposal includes provision for an enforcement mechanism, which
describes the steps that would be taken in the instance that an FPS Direct Participant failed to pay its CRM Fee in accordance with the FPS Rule.
Exemptions
UK Finance has set out that it is proposing a series of exemptions. It explains this is to address
“specific issues raised where a mandatory fee might be considered unfair, an impediment to
competition or otherwise compromise the attractiveness of FPS as a payment channel”. The exemptions it proposes are set out below. (You can see UK Finance’s rational for each exemption
in its Change Request).
Exemption #1 – Payments Originating Overseas and Returns. These payment types
would not attract the CRM Fee.
Exemption #2 - De minimis threshold. The first 100,000 Faster Payments transactions per annum sent by each FPS Direct Participant would not be subject to the requirement to
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fund the No Blame Fund. Each payment over this threshold will be charged the full flat rate
levy unless they are subject to another exemption.
Exemption #3 – No current accounts. Exclusion of FPS Direct Participants with no current
or payment account offerings. The Direct Participant do not allow customers to make Faster Payments from a payment account.
Exemption #4 – Pre-set accounts. FPS Direct Participants whose customers can only pay
to pre-set up accounts and this is the only product offering.
Exemption #5 - Low level value of transactions. All transactions below £30 would be exempt.
UK Finance explains that “It should be noted that the exemptions are cumulative. The de minimus exemption will be applied after all other exemptions (therefore PSPs will be exempt from the CRM fee
on the first 100,000 eligible FPS transactions that are not otherwise exempted)”.6
Repayment of interim funding
As explained in the background section, seven PSPs have agreed to provide interim funding for the
no blame fund. This will be provided for eligible ‘no blame’ claims which arise between 28 May
2019 to 31 December 2019. The seed funding provides a no blame fund which can be accessed by
customers of PSPs who are signed up to the APP CRM Code and who have either contributed in this interim period or provided additional confirmation that they will abide by the rules of the
interim fund for this period. However, customers of PSPs who are not part of the Code cannot access this interim fund.
UK Finance has explained that this interim funding has been provided on the basis that it would be paid back to the seven PSPs once the long term funding arrangement has been put in place. The
rationale behind this was that the funds would be accessible by those PSPs in the industry who
were Code Signatories and who had made payments to their customers who had suffered APP scams in ‘no-blame’ circumstances. Accordingly, it was considered reasonable and proportionate for the seven institutions to be repaid by the industry, via the No-Blame Fund, once long-term funding arrangements were established7.
The proposal is that the seven PSPs can recover their contribution through the CRM levy. All PSPs would cover this cost, regardless of whether PSPs’ customers have benefited from access to the no blame fund during 2019.
In the next section of the paper we set out the questions that we want your views on to support
our assessment of this proposal.
6 See p33 of the UK Finance change request. 7 See p25 of the UK Finance change request.
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4 Our Questions In order to support our assessment of the proposal made in the Change Request, Pay.UK wants to obtain insights and information from those stakeholders who would be affected by the change.
We want to know your views on the proposed rule change and we’re seeking evidence as to the impact of the change for your business and the wider sector.
To help do this, in this section we ask a number of questions about the proposal. We have gathered our questions into five groups which are explained below.
To support your consideration of each group of questions we have also provided an accompanying discussion of the proposal at Annex A. For ease, the Annex A discussion maps against the five groups of questions and is aimed to help you think about the different questions
that we are asking.
You will also find a full list of questions at the separate response template which has been
published alongside this paper. It would be very helpful to us if you would use this document to provide your response to our consultation. The consultation closes on 1 October 2019.
Question Group A - The use of the FPS Rules to support
implementation of a voluntary industry initiative.
We want to understand views on using an FPS rule to provide a funding mechanism for the Code.
We also want to get the perspective of the different PSPs who would be required to pay the CRM Fee.
A1) What are your views on using an FPS Rule to provide a funding mechanism for the Code’s no-blame fund?
A2) If you are a PSP, what are your views on paying a CRM Fee?
A3) If you are a PSP, would the implementation of the proposed FPS Rule have any cost implications for you (other than the CRM Fee itself)?
A4) What are you views on the interaction between the proposed FPS Rule and the
proposed FPS CRM Fee Governance Group?
A5) If you are a PSP, do the proposed governance arrangements to manage changes to the CRM Fee provide you with sufficient ability to be able to influence and manage fluctuations in the level of the CRM Fee?
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Question Group B - Consumer benefits.
We would like your views on whether the FPS rule change would support improved consumer outcomes and whether it would incentivise the industry to take steps to reduce APP fraud overall.
B1) Do you think that the proposed rule supports improved consumer outcomes? Does this vary depending on whether the consumer’s PSP has or has not signed up to the
Code?
B2) Would the proposed rule create incentives for PSPs to invest further to help reduce fraud for their own customers?
B3) Are these improved consumer outcomes dependent on the proposed CRM Fee, or do you think that there are alternative ways that these improved consumer outcomes
could be delivered (e.g. a different FPS rule or other means altogether)? Please provide an explanation of your view.
B4) How do you currently plan to ensure your customers are reimbursed in ‘no blame’
situations? Would this change if the proposed FPS Rule were (or were not)
implemented?
Question Group C - Competitive effects.
We want to understand any views you have on how the proposed rule change would have an
impact on competition. This includes questions exploring whether the proposed CRM Fee, and risk sharing provided by access to the no blame fund, would influence your use of FPS or impact
your business model.
A concern we have identified in this area is on the proposed use of monies raised from FPS users to cover the cost of APP Scams associated with other payment types (CHAPS and “on-us”
transactions). We include some specific questions on this point below.
C1) What are your views on the FPS Rule being used to fund reimbursement in relation to no blame APP Scams executed over FPS, CHAPS and on-us transactions?
C2) What are your views on the likely development of the level of no blame APP Scams executed over FPS, CHAPS and on-us transactions in the future?
C3) Do you think the CRM Fee would cause your firm, or PSPs generally, to consider
using alternative payment systems for transactions? C4) If you are a PSP, and given your particular business model and use of FPS, do you
think the CRM Fee would have a noticeable effect on your overall costs? (How would these costs compare to those you would incur through the approach you described at B4?).
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C5) Do you think that uncertainty over the future level of the CRM Fee would create challenges for your firm or PSPs generally? (How does this compare to the uncertainty
attached to the approach you described at B4?).
C6) What are your views on using the volume of transactions as the basis for calculating the CRM Fee, or would a different metric be better?
C7) What are your views on the calculation of the CRM Fee being based on sending transactions only as opposed to applying on both sending and receiving transactions?
C8) Do you think that there will be any cross-subsidisation between PSPs and, if so,
would this be likely to be significant? C9) If you are a PSP - in the case of a large APP scam, do you value the risk-sharing or insurance element of the no blame fund or would there be alternative ways you could
offset this risk and maintain the same protection for consumers (without recourse to
the no blame fund)?
C10) Are there other benefits of sharing the risk of no blame APP scams that Pay.UK
should be aware of?
Question Group D - Proportionality for different service-users.
The change request includes a series of exemptions from the requirement to fund the no blame
pot. We want to understand your views on the principle of including exemptions, any specific
views you have on the five exemptions included and whether there are any exemptions that you think are missing from the proposal.
D1) What are your views on the principle of having exemptions from the requirement to fund the no blame pot?
D2) What are your views on exempting Payments Originating Overseas and Returns from the
CRM Fee? Do you have any evidence that this would be an appropriate exemption?
D3) What are your views on exempting small FPS Direct Participants from making a
contribution to the no blame fund? Do you have any evidence that this would be an appropriate exemption? D4) What are your views on using 100,000 as the level of transactions at which to set such an
exemption?
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D5) What are your views on exempting PSPs who do not have current or payment account
offerings? Do you have any evidence that this would be an appropriate exemption? D6) What are your views on exempting transactions to pre-set accounts from the CRM Fee? Do you have any evidence that this would be an appropriate exemption?
D7) What are your views on exempting individual transactions below £30 from the CRM Fee? Do you have any evidence that this would be an appropriate exemption?
D8) Is £30 the appropriate cut off point for any low value payment exemption or should this be set at a higher or lower level? D9) Are there any exemptions that are missing, in particular any the lack of which could make the proposed funding mechanism disproportionate for any particular PSPs or
transactions?
D10) What are your views on the proposed FPS Rule retrospectively funding the interim no blame fund?
Question Group E - The practicalities of the proposal from an
implementation and operational perspective.
We want to understand any operational implications for your business and get your perspective on the proposals made for dealing with non-compliance with the rule.
E1) Can you foresee any challenges from an operational or practical perspective in
implementing and administering the proposed arrangements that Pay.UK should be aware
of? E2) If you are a PSP, are there any tax implications for you relating to the payment of the CRM Fee and the making of claims from the no blame fund?
E3) What are your views on the administrative costs associated to operating the no blame fund? E4) What are your views on the proposed enforcement process? Do you have any other
suggestions for how the CRM Fee should be enforced? E5) Would the proposed enforcement process be effective in cases of non-payment of the CRM Fee?
E6) What would be your views on Pay.UK sanctioning an FPS Participant for failing to comply with an FPS rule requiring a contribution to a funding mechanism for a voluntary industry
Code?
E7) What are your views on the proposed different escalation process for the proposed FPS Rule compared to Pay.UK’s normal escalation and sanctions processes?
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5 Next Steps
Responses to the Call for Information
We’ve set out a number of questions in this document on which we are seeking your views and
information. A response template is provided alongside this paper. We would appreciate it if you
would use this template to respond to the Call for Information.
Please provide your completed response to the Call for Information by 5pm on Tuesday 1 October 2019. Pay.UK will use the responses and evidence provided, as well as any further economic and
legal analysis that we undertake, to support our assessment of the Change Request. The Pay.UK Board, as an independent Board, shall then decide in its absolute discretion whether and when any consequent changes would become effective.
You should send your response to [email protected] Please provide your response in a
Word document. Where information you provide is commercially sensitive, please identify it by
labelling it [CONFIDENTIAL] and yellow-highlighting it in the Word document.
Should we receive responses to this Call for Information relating to the merits of alternatives
model we will pass these comments on to UK Finance for its consideration – if you want your views
to be shared with UK Finance on an anonymised basis please indicate this in your response.
We will assess these responses and use the evidence provided to support our assessment of the
Change Request. We will aim to publish a decision on this Change Request by the end of
November 2019, subject to the volume and complexity of information and insights received in the
responses to this Call for Information and the time needed for our assessment of that feedback.
The decision document will set out reasons for our decision and will be made available on our
website along with any non-confidential responses to the Call for Information.
Stakeholder engagement
As part of this Call for Information process we intend to hold a joint Participant event with UK
Finance on 9 September. At the event UK Finance will answer any questions on the detail of their
proposal. We will also provide stakeholders with the opportunity to discuss some of the issues
raised in this paper, with the aim of informing your response to the consultation. Please contact
[email protected] if you would like to attend.
Alternative mechanisms
It is recognised that a contingency funding option is required should the Change Request not be
accepted by the Pay.UK Board. Therefore a Contingency Funding Steering Group has been set up.
This industry led initiative, for which UK Finance is providing the secretariat and is tasked with
identifying and investigating alternative funding options. If you would like to find out more about
the contingency funding programme please email:
19
Pay.UK Annex A – Supporting Discussion In order to support our assessment of the proposal made in the Change Request, we want to obtain insights and information from those stakeholders who would be affected by the change.
We want to know your views on the proposed rule change and we’re seeking evidence as to the impact of the change for your business and the wider sector.
To support your consideration of each group of questions that we set out in Chapter 4, we have also provided an accompanying discussion of the proposal in this Annex. For ease, the discussion
in the following sections maps against the five groups of questions raised in Chapter 4 and is aimed to help you think about the different questions that we are asking.
Question
Group
Summary Pages
A The use of the FPS Rules to support implementation of a voluntary
industry initiative. We want to understand views on using an FPS rule to provide a funding mechanism for the Code. We also want to get the
perspective of the different PSPs who would be required to pay the CRM Fee.
20-22
B Consumer benefits. We would like your views on whether the FPS rule
change would support improved consumer outcomes and whether it would incentivise the industry to take steps to reduce APP fraud overall.
23-25
C Competitive effects. We want to understand any views you have on how
the proposed rule change would have an impact on competition. This includes questions exploring whether the proposed CRM Fee, and risk
sharing provided by the access to the no blame fund, would influence your
use of FPS or affect your business model.
26-30
D The proportionality of the proposal for different groups of service-
users. The change request includes a series of exemptions from the requirement to fund the no blame pot. We want to understand your views
on the principle of including exemptions, any specific views you have on the five exemptions included and whether there are any exemptions that you think are missing from the proposal.
31-36
E The practicalities of the proposal from an implementation and operational perspective. We want to understand any operational
implications for your business and get your perspective on the proposals made for dealing with non-compliance with the rule.
37-39
In some areas, that we consider to be important for our Board’s consideration of the proposal, we have undertaken work additional to that included in the change request to allow us to support this
initial discussion on the proposal.
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A. The use of the FPS Rules to support a voluntary
industry initiative
The Change Request made by UK Finance is proposing that Pay.UK, as the operator of the FPS
payment system, introduce a mandatory rule requiring that the FPS Direct Participants fund a
voluntary endeavour – namely the monies for the APP scams no blame fund. This proposition therefore needs careful consideration, as by introducing the requested rule Pay.UK would be compelling FPS Direct Participants to play a mandatory role in this voluntary initiative.
Using an FPS Rule to support the Code would have two key effects considered in this section, namely to:
Increase the number of PSPs that pay into the no blame fund; and
Transfer certain responsibilities from Pay.UK to Code governance.
These are explained further below.
Increased number of PSPs that pay into the no blame fund
Applying the proposed rule change would increase the number of PSPs that contribute to the no blame fund in two ways.
Transaction volumes associated to indirect PSPs whose sponsor PSPs are Code signatories
would be used in the calculation of the contribution to the no blame fund. Since these
“indirect” transactions are used in the calculation, the CRM Fee relating to these “indirect”
transactions may be passed on by FPS Direct Participants acting as sponsor PSPs to their
indirect PSPs; and
Transaction volumes associated to FPS Direct Participants who are not Code signatories
would be used in the calculation of the contribution to the no blame fund.
In both cases, certain PSPs that have chosen not to join the voluntary Code would be obliged to pay money into the fund.
In theory, the non-signatories could choose not to use FPS for payment transactions in order to avoid facing this cost. In practice, given the importance of FPS transactions for most PSPs, it
seems unlikely that PSPs would be able to cease using FPS without adversely impacting their business. Furthermore, if PSPs did decide to stop using FPS, this could be damaging to FPS as a whole and could also disadvantage end users. Not only would the exiting-PSPs’ customers be
unable to use FPS to send and receive transactions, but customers of other PSPs would be unable to use FPS to send and receive transactions to and from the exiting-PSPs’ customers. Alternatively, the proposed rule could lead FPS Participants to sign up to the Code when they had
not previously done so because they would in any event be obliged by the FPS Rule to contribute to the no blame fund. Pay.UK notes that the Code prescribes more responsibilities than the no blame situation, implying that PSPs would face a wider set of issues than simply contributing to the no blame fund when determining whether or not to sign the Code. If additional PSPs were to
21
join the Code because the FPS Rule requires them to contribute to funding the no blame fund
(irrespective of whether they are Code signatories), then the FPS Rule would have altered an otherwise voluntary decision.
Given that some PSPs have chosen not to join the Code, some PSPs may be unwilling to pay the
CRM fee. This is an important consideration for Pay.UK as while we have the right to impose a fee for any funding needed in relation to the operation of the FPS system, the CRM fee might be
outside of this scope. This is because the no blame fund is not under the operation of Pay.UK and does not relate to the business-as-usual operation of the existing FPS payment system or
development of its New Payments Architecture (NPA) replacement.
FPS Rule 13.1.1 currently only allows Pay.UK (in its capacity as FPS operator) to impose charges
which are associated with the cost of running the system. Therefore a further rule change may need to be considered and consulted on to enable FPS to impose ‘other’ charges which would
encompass the CRM Fee. Understanding FPS participants’ views about the merits of introducing
the proposed rule is therefore a relevant consideration for Pay.UK.
Transferred responsibilities from Pay.UK to Code governance
and governance arrangements generally
Pay.UK is being asked to introduce an FPS Rule which would provide for a method of calculating
the contribution to the no blame fund as well as bringing in new enforcement mechanisms to ensure compliance with this rule. Pay.UK recognises that the proposed CRM Fee would create an on-going liability for FPS Direct Participants (which may be passed on to other Participants). As
such, we expect that FPS Participants will want clarity about the likely level of the CRM Fee and
certainty about how this charge might change in the future to reflect changes in the number of
APP scams that are compensated through the no-blame fund.
UK Finance has undertaken modelling on the level of the initial CRM Fee – they expect it to be
initially set at around £0.029 per qualifying transaction. They consider this level would be
appropriate to generate sufficient monies to cover the no-blame fund based on current projections.
UK Finance has also proposed a set of governance arrangements to deal with changes in the
necessary size of the no blame fund (see also UK Finance annex 6):
“The Fund Administrator will provide ongoing oversight of the No Blame Fund and MI to ensure sufficient levels of funds are in place to meet the reimbursement needs for the No Blame Fund. If the level of the No Blame Fund appears inadequate to meet the reimbursement needs, further consultation will be undertaken in accordance with the proposed governance arrangements for the CRM Fee (please see annex 6). Similarly, in the event that the No Blame Fund is in surplus at the year-end, the proposal is that these surplus
funds will potentially be repatriated to PSPs based on their percentage of contributions.”
Although Pay.UK would introduce the FPS Rule, once in place, changes to the effects of the FPS
Rule would appear to lie with those governing the Code (or its no blame fund) and not with
Pay.UK. In particular, this includes decisions regarding:
22
a) Definitions and requirements in the Code such as new standards that PSPs might need to
meet in order to fall within a no blame situation (and therefore be eligible to use the no
blame fund);
b) The scope of which payment system transactions are covered by the Code;
c) Definitions of when reimbursement can be claimed from the no blame fund (including the
ability to widen or narrow the scope of such situations);
d) Whether existing exemptions are retained or changed, and whether new exemptions are
added;
e) The administration of payments into and out of the no blame fund; and
f) Incurring administration and management costs associated to the operation of the no
blame fund.
Taking responsibility for these decisions involves taking responsibility for the value of the CRM Fee
contribution that would be required from each Direct Participant under the proposed FPS Rule
change, as it involves responsibility for something that impacts the cost of FPS transactions.
Although responsibility for changes to the Code would lie with those governing the Code, enforcement of the proposed FPS Rule would remain with Pay.UK as it would be an FPS Rule. This
means Pay.UK would enforce compliance with contributing to the no blame fund, but would not
have control of the decisions which determine those contributions. UK Finance has indicated that
the latter would be determined by the FPS CRM Fee Governance Group (see UK Finance Annex 6).
Pay.UK recognises that, as a payment system operator regulated by the Payments System
Regulator and supervised by the Bank of England, it has responsibilities to ensure that it operates payment systems appropriately. Pay.UK must meet various regulatory requirements in doing this
and must follow appropriate governance arrangements to ensure that regulatory requirements
are met. By contrast, the Code is voluntary, is not regulated, and has currently specified only
limited governance arrangements such as the proposed FPS CRM Fee Governance Group.
The only mechanism through which certain FPS Direct Participants would be involved in the governance in relation to the decisions (a) through (f) described above is through the FPS CRM Fee
Governance Group, which is not subject to the same regulatory oversight or requirements as
Pay.UK, and does not have the same corporate objectives as Pay.UK does.
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B. Consumer benefit
There are clear end user benefits for customers from arrangements which protect them in the case of APP Scams. Consumers, micro-enterprises and charities (referred to as “consumers” below for convenience) whose PSP has signed the Code will be protected through the Code, while those whose PSP has not signed the Code may also receive greater protection.
1. Code PSPs’ consumers
Under the Code, reimbursement will be paid out in individual cases of fraud where consumers might otherwise suffer significant harm. This would bring substantial benefits to those particular consumers.
Consumers whose PSP has signed the Code would also have increased confidence in using
payment systems in which they know their transactions are protected from the consequences of
fraud. This should increase the extent to which consumers are willing to use the payment system and therefore increase the use of such payment systems. This increased confidence is likely to be
beneficial for future innovation in respect of payment initiation services that use FPS as well as maintaining confidence in the existing uses of FPS (and, going forward, in the NPA).
The Code sets out a variety of different scenarios in which consumers who are not to blame for
fraud will be compensated. The Code requires co-operation between, and obligations on, both
sending PSPs and receiving PSPs. This provides incentives for both sending and receiving PSPs to
meet the requirements of the Code and as such should lead to incentives to prevent and reduce fraud for both sending and receiving PSPs, which would ultimately be to the benefit of all customers.
One of the scenarios in the Code relates to is the “no blame” situation, while other scenarios set out how different PSPs will compensate customers where one or more party in the transaction has
failed to meet the expected standards. As such, consumers whose PSP has signed the Code benefit
from a consistent approach to being compensated by those PSPs.
The proposed FPS Rule relates to a method of calculating the CRM Fee and requiring the payment of this fee. Pay.UK is not calling for information on the Code itself, how the no blame fund will be organised and administered, or how its funding decisions will be taken. It is primarily the presence
of the Code itself, rather than the proposed FPS Rule, that generates the protection for consumers whose PSP has signed the Code. Unless the FPS Rule is the only method of ensuring that Code PSPs adhere to the Code generally, and provide reimbursement to consumers in the no blame situation specifically, then it would not appear to be the FPS Rule in itself that generates the
consumer benefits for customers of those PSPs that sign the Code.
2. Non-Code PSPs’ consumers
For consumers that are customers of PSPs that have not signed the Code, UK Finance envisages the following approach in which customers use the Financial Ombudsman Service (FOS):
24
“Where the sending firm finds themselves not to be at fault, and where no funds remain, the
firm will notify the customer that in this case they are unable to reimburse, or repatriate and will advise of their rights to complain. If the customer chooses to raise a complaint with the
Firm, the DISP process will be followed. If the complaint investigation does not alter the firm’s initial decision, the customer will be sent a final response letter outlining their rights to
complain to the FOS.
The customer may then raise a complaint with the FOS. The FOS we believe will assess all cases following their current process. If the FOS find that all parties could not have done
more within this case, the sending firm may then choose to submit a claim to the no-blame fund on behalf of their customer.”8
We therefore understand that consumers whose PSP has not signed the Code therefore have to follow a different process compared to consumers whose PSP has signed the Code. Using the
standard FOS complaints process would likely involve additional steps for those consumers whose
PSPs are not signed up to the code (when compared against the experience for consumers of PSPs
who are code signatories). At the end of this process, we understand from UK Finance that it is envisaged that the FOS would conclude that no parties are to blame and then the sending PSP can choose whether to submit a claim to the no blame fund, although the sending PSP would appear not to be under any such obligation (unless this was itself part of the FOS determination).
There does not appear to be a method envisaged in the Code for non-Code PSPs to subject
themselves to any no blame “tests” so as to pro-actively agree that the consumer is not to blame (and therefore avoid the customer having to submit a claim via the FOS).
UK Finance explains that it is intended that those consumers who pursue a claim via the FOS will
receive reimbursement in the no blame scenario. It seems reasonable to believe that those PSPs who have signed the Code will only allow access to the no blame fund for the benefit of non-Code consumers because those non-Code PSPs have contributed to funding the no blame fund (indeed
this is an argument put forward in support of the proposal). As such, the benefit to non-Code
PSPs’ consumers receiving reimbursement from the no blame fund arises only because the CRM Fee applies to non-Code PSPs.
It seems possible that some proportion of non-Code consumers would not pursue their claim(s)
via the FOS. Consumers with larger claims would be expected to be willing to undergo the extra effort, but those with smaller claims might not. Such consumers would therefore not receive
reimbursement and therefore would not receive benefit from the no blame fund. This would also mean non-Code PSPs would be cross-subsidising Code PSPs to the extent that some of the non-
Code PSPs’ consumers would not pursue their no blame claims via the FOS. Overall, there would therefore not be a consistent process for all consumers. There could be
additional benefits for all consumers knowing that they might be compensated in the event of a no
blame APP scam (e.g. when compared to there not being a mandatory requirement in place).
However, this would not guarantee that all consumers would be compensated in the same way in no blame scenarios (for the reasons set out above), or indeed in other scenarios (as non-Code PSPs are not obliged to follow the approach to reimbursement laid out in the Code for these other scenarios, and the FOS may not apply the Code standards and approach to non-Code PSPs).
8 See p31 of the UK Finance change request.
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3. Non-consumer customers
Not all end users of FPS will benefit from the Code since business customers are excluded from the scope of the Code. As described further in section C, under the current proposals business
customers may end up cross subsidising the protection for consumers.
26
C. Competitive effects
This section looks at considerations relating to the promotion of competition.
1. Payment system transactions covered by the Code
The definition in the Code of APP scams covers transfers of funds executed across “Faster Payments, CHAPS, or an internal book transfer” (i.e. where the sending PSP is the same as the receiving PSP, also referred to as “on-us” transactions). The proposed FPS Rule would therefore
relate to some transactions which are not executed across FPS. The pattern of transactions over FPS, CHAPS and “on-us” transactions differs noticeably with CHAPS typically having much higher average value transactions compared to FPS. This also applies to the pattern of fraud as is seen in Table 1 below.
Table 1: APP Fraud transactions
Volume Proportion
by volume
Value Proportion by
value
Average fraud
(mean)
FPS 115,332 98% £251.6m 90% £2,182
CHAPS 652 0.6% £26m 9% £39,877
On-us 1,722 1.5% £3.3m 1% £1,916
Source: Fraud the Facts 2019, UK Finance. Figures are for 2018. Proportions are calculated out of the total for FPS, CHAPS and on-us
transactions and exclude other forms of APP fraud such as over Bacs and International fraud. Proportion by volume sums to more than 100% due to rounding.
Using FPS transactions (i.e. over the FPS payment system) as the basis for funding the no blame
fund would involve FPS Direct Participants funding the reimbursement mechanism for fraud executed over CHAPS (a different payment system) and fraud executed within the same PSP (on-us transactions, which are within the same PSP and therefore do not go over a payment system).
It is unclear that this would be an appropriate approach to take for a rule in FPS.
UK Finance has not provided an estimate of the no blame fraud that is expected from CHAPS and on-us transactions. If those transactions represent a similar proportion of the no blame fraud as of
APP fraud more generally, then around 10% of the no blame fund would be attributable to non-FPS transactions. Using UK Finance figures, including non-FPS fraud would have the effect of
increasing the per transaction fee from around 2.6p to 2.9p.9 As well as increasing the price of FPS
transactions in absolute terms, the CRM Fee would also raise the price of FPS transactions relative to CHAPS transactions (compared to the situation that currently exists today in the absence of the CRM Fee).
9 This is calculated as 2.9044p multiplied by (1-10.43%) where 10.43% is the sum of APP Fraud in CHAPS and
on-us transactions shown in Table 1 above (rounded to 10% in the table). The figure of 2.9044p is based on
the price after the proposed exemptions as included in the UK Finance change request. (See p36).
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2. Nature of the fee
(a) Per transaction fee The proposed fee is to be calculated per relevant FPS transaction. This is similar to the approach used for the FPS costs for Pay.UK and Vocalink which are also recouped on a per transaction basis. Section D below examines the proportionality of various different proposed exemptions where
transactions would not be included for the calculation of the fee, but this section examines the competitive effects of the proposal to calculate the fee based on the volume of FPS transactions sent. UK Finance has calculated that the CRM Fee (after exemptions) would be around 2.9p per
transaction sent. It is therefore possible that the additional fee might cause some PSPs to seek to use alternative payment systems over which to execute some transactions.
It is envisaged that the CRM Fee would be set so as to apply for the forthcoming year, which means
that there will be uncertainty as to the future level of the CRM Fee. The future value of APP Scams to be paid out from the no blame fund is unknown and will be the key determinant of the future
level of the CRM Fee. This raises the possibility that the future CRM Fee could be significantly different from the current level.
If the CRM Fee set leads to insufficient funds being collected by the Fund Administrator compared
to the size of claims against the no blame fund, then the proposed governance indicates that there may be an ad hoc meeting of the proposed CRM Fee Governance group to alter the level of the per
transaction CRM Fee. This causes uncertainty as to the future level of the CRM Fee.
(b) Volume-based fee A per transaction fee would apportion the cost of no blame APP Scams across all FPS Direct
Participants fairly according to the volume of transactions. This method is similar to existing Pay.UK and Vocalink costs which are also apportioned based on the volume of transactions and charged to FPS Direct Participants.
As noted above, the total cost of the no blame fund will depend on the value of APP scams and of no blame APP scams. The value of APP scams is likely to be correlated to the total volume of FPS transactions given that 90% of APP scams are currently over FPS. The value of APP scams is also
likely to be correlated to the total value of FPS transactions. If the total cost is more closely linked
to the value of transactions, then a volume-based fee could lead to cross subsidies from PSPs whose pattern of transactions represent a smaller proportion of value than volume, and towards PSPs whose pattern of transactions represent a higher proportion of value than volume. One of
the exemptions proposed by UK Finance is to exclude low value (below £30) individual payments from the number of transactions used to calculate the CRM Fee, which would reduce (but not
eliminate) the extent of any such cross-subsidy.
(c) Sending and receiving transactions The proposed FPS Rule uses the total number of outbound or “sending PSP” transactions as the
basis for the calculation of the CRM Fee. In total, the number of FPS transactions sent must equal the number of FPS transactions received, but this is not the case on an individual PSP basis, as some PSPs may send more FPS transactions than they receive or vice-versa.
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Payments that go over FPS involve both a sending PSP and a receiving PSP. Fraud can arise within both sending PSPs and receiving PSPs, and therefore incentivising both sending and receiving
PSPs to take action to limit fraud is beneficial to all end users (assuming the cost of taking action is less than the cost of the fraud itself). Applying the proposed CRM Fee on sending transactions only
therefore may slightly reduce the incentives for receiving PSPs to take additional action against incoming fraud. This would tend to result in the cost of fraud at receiving PSPs with less effective
fraud controls being cross-subsidised by other PSPs. It is unclear whether there might be competitive implications from the CRM Fee only applying on the number of sending PSP
transactions (instead of sending and receiving transactions) as this would depend on the pattern of fraud and the pattern of transactions at different PSPs.
3. Risk-sharing between PSPs
Under the Code, all participating PSPs are required to take reasonable steps to protect their customers from APP scams and to protect accounts from being used to launder the proceeds of APP scams. This includes steps to detect, prevent and respond to APP scams and the receipt of funds from such scams.
(a) Fraud incentives for PSPs PSPs can make different choices about how to meet these standards to protect their customers.
PSPs also have a choice about whether they decide to take steps that go beyond this standard. Since the cost of no blame fraud is shared across all FPS Direct Participants, those PSPs that are more successful in reducing fraud because they go beyond these standards and have more
effective fraud controls would nonetheless have to share the cost of fraud generated by other PSPs that don’t exceed these standards.
The result of this is that those PSPs that implement higher-standards (with a proportionately
lower value of APP Scams), will cross-subsidise other PSPs (with a proportionately higher value of
APP Scams). This also means that higher-standard PSPs may therefore be less able to use their
lower fraud costs to their competitive advantage by passing on their lower costs or higher service quality to their customers.
In turn, while investing in fraud protection would reduce other forms of fraud (i.e. not only fraud associated to the no blame situation), this may also lead to slightly blunter incentives to invest in
fraud protection because higher-standard PSPs face the full cost of investment to reduce no blame fraud but only benefit from a proportion of the fraud reduction.
(b) Large and small PSPs A separate issue to do with cross-subsidies is that of centralised risk-sharing between PSPs and
the impact of very large value APP scams. The no blame fund means that individuals PSPs would be insured against the consequences of very large value no blame APP scams. In the absence of a
fund such as the no blame fund, if there are occasional APP scams that are of very large value, then it would be expected that large PSPs with a higher total value of transactions would be better able
to absorb the cost of these scams into their business. By contrast, it is likely to be more difficult for smaller PSPs to absorb the cost of an unusually high APP scam.
29
As such, if all PSPs compensated their customers, sharing the cost of no blame APP scams might
bring an advantage for small PSPs.10 This is because they would only face a small proportion of the cost of a very large value no blame APP scam rather than the full cost of it. However, irrespective
of the presence of the no blame fund, small PSPs would still have to face the impact of large value APP scams which are not captured under the no blame definition (assuming this was not passed
onto another party).
(c) No blame and other fraud
The Code sets out various different scenarios in which participating PSPs have to contribute to the cost of APP fraud for particular transactions if they are at fault, as well as where they can apply to the no blame fund to pay reimbursement for fraud. This creates an incentive for PSPs to claim that they were not at fault in order that the reimbursement is paid from the no blame fund (or
another PSP) rather than having to contribute a greater proportion of the cost directly. This may
cause the total cost of the no blame fund to increase.
The Code sets out the responsibilities of PSPs at a principled level. This may also lead to some situations where there is ambiguity as to whether a PSP has met the no blame criteria, as PSPs
again have an incentive to argue that they are not to blame.
Both of these effects may lead to an increase in the proportion of transactions that are claimed to meet the no blame criteria and thereby increase the value of claims against the no blame fund
(and thus the total value of the no blame fund that needs to be funded through the FPS Rule). The
extent to which this effect is prevented will depend on the effectiveness of the Fund Administrator.
(d) Non-Code PSPs and no blame fund If the receiving firm is a non-Code PSP which is considered to be at fault, but it is unwilling to bear
any costs of compensating the customer, then the Code PSP can seek reimbursement from the no
blame fund. The ability to make such a claim may create an incentive for Code PSPs to claim that
non-Code PSPs are at fault. This may also lead to an increase in the total cost of the no blame fund.
This effect leads to a cross-subsidy towards the non-Code PSP compared to the position where
they are willing to provide the reimbursement compensation specified under the Code – although having not signed up to the Code those non-Code PSPs are not failing to do something they had said that they would do. The proposed funding would marginally reduce this cross-subsidy since
the non-Code PSP would be contributing something to the fund. It leads the consumer to be
compensated in the same way as if the non-Code PSP was actually a Code PSP.
4. Impact on marginal FPS costs
Calculating the contributions to the no blame fund based on the volume of FPS transactions will lead to a change in the marginal cost of using FPS for FPS Direct Participants. The new marginal
cost for all FPS Direct Participants will increase and will be equal to the old marginal cost plus the CRM Fee.
10 This assumes that all other forms of risk and fraud are equal. The advantage described is limited to the
pure risk sharing of unusually high value APP scams, it should not be interpreted as implying that PSPs face
higher or lower APP scam frauds due to the size of the PSP.
30
Since all FPS Direct Participants would be facing this increased cost, the CRM Fee does not necessarily distort competition between PSPs compared to the current situation. It does, however,
raise costs for all FPS Direct Participants in exactly the same way. This may mean that FPS Direct Participants are more likely to be able to pass on these costs by charging higher prices to their
customers including Indirect Participants.
By contrast, if PSPs faced different marginal costs due to fraud, it would be more difficult for them to pass on any increased cost to customers because some PSPs would have lower costs and would
therefore be able to keep prices down.
5. Gross v net funding
Closely linked to the issue surrounding raising the marginal cost of FPS transactions is what could
be described as “gross funding”. If it is the case that PSPs are equally likely to face no blame APP fraud, then a PSP which represented 10% of transactions would also be expected to make 10% of claims for repayment from the no blame fund. In this way the PSP would contribute 10% of the gross no blame fund and reclaim 10% of the gross no blame fund - thereby simply receiving back
what it had already put in, resulting in a net zero position with respect to the fund, and then
paying this out to customers. As noted above, divergences from having the same proportion of contributions as claims will reflect some degree of cross-subsidies between PSPs.
In this example, there would be no distinction in the cost for the PSP between the scenario of
funding via the no blame fund (paying 10% in, receiving 10% back out and then paying out to their customers) as compared to PSPs simply paying out to their customers from their own resources. However, the CRM Fee increases the marginal cost of FPS transactions for all FPS Direct
Participants in the same way. As described above, this may mean that FPS Direct Participants may
be able to pass on these higher prices to other customers, including their Indirect Participants.
6. Innovation
As explained earlier, there is uncertainty surrounding the future levels of the CRM Fee. Currently the CRM Fee is estimated as being slightly less than 3p per transaction. For smaller FPS Direct Participants the absolute value of their contribution will be small given their low transaction
volumes (or may even be zero if those FPS Direct Participants benefit from one or more of the
exemptions – see section D). Uncertainty surrounding the development of APP fraud at other PSPs could cause some PSPs to be reluctant to invest in, and innovate around, FPS transactions because of the exposure that an
individual PSP would have to fraud on payments it was not involved in. As well as uncertainty
surrounding the future level of the CRM Fee, there may also be uncertainty around whether
payments related to a particular new business model might be eligible for exemptions, and
uncertainty surrounding the process and time needed to establish whether such exemptions
would be available.
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D. Proportionality
The method of calculating contributions to the no blame fund is proposed to be based on the number of FPS transactions. However, various exemptions to the relevant number of FPS transactions have also been proposed. As noted earlier, these have been proposed by UK Finance in order to address specific issues raised where a mandatory fee might be considered “unfair, an
impediment to competition or otherwise compromise the attractiveness of FPS as a payment
channel”.11 From our analysis of the exemptions, we believe that the exemptions would need to be applied in
the following order:
o Exemption #3 (No current accounts) and Exemption #4 (Pre-set accounts) first as these
relate to participant characteristics;
o Exemption #1 (Payments Originating Overseas and Returns) and Exemption #5 (Low level
value of transactions) second as these relate to transaction characteristics; and last o Exemption #2 (100,000 De minimis threshold) as this relates to remaining number of
transactions once the other exemptions have been applied
For convenience we use the same numbering for the exemptions as in the proposed Change Request. UK Finance estimate that the price per transaction with these exemptions would be £0.0290 and the price without the exemptions would be £0.019612.
1. Exemption 1 – Overseas and Returns
Payments Originating Overseas are described as being exempt because these transactions would
not be covered by the Code (as they are not “UK transactions”) and therefore PSPs whose customers are victims of APP fraud using such payments would not be able to claim from the no
blame fund. Returns are described as being exempt because “they carry no risk of APP fraud” –
because they return payments back to the original account.
Both Payments Originating Overseas and Returns are identifiable to an extent within FPS, by using any BIC data that has been included in the payment instructions (although this may not identify all Payments Originating Overseas since sending BIC data is not mandated).
Since Payments Originating Overseas are not covered by the Code and Returns attract no APP fraud risk, there is an objective reason to exclude these.
These transactions represent less than 0.1% of FPS transactions and therefore the exemption will
make minimal difference to most PSPs. Some PSPs with a disproportionately high number of
Payments Originating Overseas would otherwise cross-subsidise other PSPs. However, the
absolute significance is relatively small since contributions to the no blame fund associated to all of these transactions at all PSPs would be less than around £50,000.
11 See p2 of the UK Finance chance request. 12 See p36 of the UK Finance change request.
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2. Exemption 2 – De minimis threshold
The first 100,000 transactions for each FPS Direct Participant will not be included in the calculation of the relevant number of their FPS transactions on which the CRM Fee will be calculated. The
proposal states that “This exemption is to ensure that the CRM Fee does not act as a barrier to entry for smaller PSPs as an unexpected cost.”13
Having a de minimis threshold such as this is expected to benefit smaller FPS Direct Participants
compared to larger FPS Direct Participants since it will remove some of the small participants from being required to make any contribution at all. However, the proposed FPS Rule could
discriminate between small FPS Direct Participants and similarly sized FPS Indirect Participants since each Indirect Participant would not automatically benefit from their own exemption (as under the Code FPS Direct Participants would be free to decide whether to pass on the CRM Fee
and whether to pass on the benefit of any exemption).
Although there is a difference in the marginal cost of FPS transactions for these different PSPs, the total cost of contributions also needs to be considered. The precise contribution per FPS transaction will depend on the actual amount of fraud that the no blame fund pays out for, as well as the exemptions that are applied, but it is estimated in the Change Request that the CRM Fee will
be less than 3p per transaction. Hence the cost of 100,000 transactions would be less than £3,000. If the exemption did not apply, Pay.UK does not expect that a cost of less than £3,000 would
represents a barrier to entry to smaller participants seeking to become FPS Direct Participants, particularly in the context of much higher upfront costs that need to be incurred for PSPs to be
technically able to become FPS Direct Participants and to connect to the FPS central infrastructure.
The level of 100,000 transactions has been proposed because “there is a large jump in numbers from the smallest Direct FPS participants who process fewer than 100,000 FPS transactions per
annum and the mid or large participants who process significantly more than 100,000 transactions
per annum. This removes a barrier to entry for the smaller PSPs.”14 It appears that the level of transactions that has been proposed for this specific exemption is therefore specifically intended
to exclude smaller FPS Direct Participants rather than being set at that level for any other reason.
The main competitive effect from this exemption therefore is to exempt a small number of FPS
Direct Participants from being required to make a contribution to the no blame fund. Large FPS Direct Participants would pay the CRM Fee, and it is possible that the cost of this would be passed
on to their Indirect Participants. This may therefore be to the competitive advantage of small FPS
Direct Participants although, as the cost saving is small (less than £3,000), any competitive advantage would also be small.
Removing a small number of FPS Direct Participants may also slightly reduce any costs of
administration linked to dealing with individual PSPs since there would be fewer PSPs for the Fund Administrator to interact with, which may very slightly reduce the total administrative costs for the no blame fund.
13 See p2 of the UK Finance chance request. 14 See p34 of the UK Finance change request
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3. Exemption 3 – No current accounts
FPS Direct Participants with no current or payment accounts offerings would be exempt from the contribution to the no blame fund. The reason given for this is that these PSPs do not allow
customers to make FPS transactions from a payment account. UK Finance indicates that transactions from such PSPs are far less likely to be victims of APP fraud, and gives PSPs that pay
known merchant acquirers only, or PSPs that do not offer current accounts, as examples of this business model. The estimate provided by UK Finance for the cost of including this exemption is
£0.001056 (on a price per transaction basis).15 This exemption would therefore lead to a small increase in the per transaction charge for all other PSPs.
The description of the exemption indicates that it applies at the level of the participant such that participants either have all of their payment transactions excluded from the contribution or none
of their payment transactions excluded (subject to other exemptions). If a PSP benefits from this
exclusion and then expanded its service by offering a payment account, it would lose the
exemption on all of its transactions, thereby facing a marginal cost equal to the value of the contribution for all transactions, rather than to the cost of transactions linked just to its payment accounts. In theory this represents a barrier to expansion although in practice the extent of the barrier will depend on the PSP’s total number of FPS transactions.
This exemption may distort competition between PSPs to some degree. For example, FPS Direct
Participants without a payment account offering would be expected to face lower costs than any FPS Indirect Participant whose sponsor PSP offers payment accounts, even where the Indirect
Participant itself does not offer payment accounts (since under the proposal sponsor PSPs are free to pass on the CRM Fee and are also free to decide whether to apply any exemption to their
Indirect PSPs). Likewise, FPS Direct Participants and their Indirect PSPs would face higher costs on similar transactions to those proposed for exclusion such as when paying merchant acquirers. This distortion arises because the exemption applies based on the characteristics of the FPS Direct
Participant, not the characteristics of the transaction. Whether the distortion is significant in
practice will depend on the absolute cost advantage as well as the marginal cost advantage.
It is unclear whether this exemption might lead to a distortion in competition between those
payments which are made on card payment systems (since the exemption applies in respect of merchant acquirers) and those payments which are made on other payment systems (where
payments to other businesses do not receive an exemption).
4. Exemption 4 – Pre-set accounts
FPS Direct Participants whose customers can only pay to pre-set accounts would be exempt from the contribution to the no blame fund. UK Finance notes that these are primarily used for savings
accounts and these transactions carry a low(er) risk of APP fraud. The estimate provided by UK Finance for the cost of this exemption is zero indicating that there is currently no PSP in this
category.16
15 See p36 of the UK Finance change request. 16 See p36 of the UK Finance change request.
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Since the exemption applies at the level of the PSP, the competitive effects of this are likely to be
similar to those described for the exemption for PSPs that do not offer a current account (see Exemption 3).
5. Exemption 5 – Low value transactions
FPS transactions below £30 would be exempt and would not be included in the relevant number of transactions for calculating the CRM Fee. There are a significant number of FPS transactions
below the value of £30, hence this exemption would have a significant effect in terms of the total number of FPS transactions used to calculate the CRM Fee for the remaining transactions. It its
change request UK Finance estimates the cost of this transaction to be £0.007305 (on a price per transaction basis).
Information has not been provided on the APP Fraud associated to transactions less than £30. If these transactions are less likely than higher value transactions to suffer from APP Fraud then the exemption would reduce the extent to which FPS Direct Participants with a disproportionately large number of transactions less than £30 would cross-subsidise other FPS Direct Participants.
Since this exemption is set with reference to transaction characteristics rather than participant characteristics, this might not distort competition between different types of FPS Participant
(unlike Exemptions 3 and 4). Since low value transactions would not attract the CRM Fee, and since Sponsor PSPs can monitor the transaction patterns of their Indirect Participants, it would
also be expected that Sponsor PSPs could decide to pass on the benefits of the exemption in some form to those Indirect Participants with a disproportionately large number of transactions less than £30.
UK Finance indicates that it may not be cost effective for PSPs to process APP Fraud for payments
of a value of less than £30 using the Code. It has also confirmed that PSPs can nonetheless
currently claim from the no blame fund for such payments. If they can choose to claim from the fund for such low value transactions, then the effect of the exemption may be that the fraud generated from these transactions would be cross-subsidised by contributions for transactions
above the £30 limit. Whether this might distort competition between PSPs would likely depend on
the size of such claims by different PSPs.
6. Alternative exemptions
UK Finance has proposed a number of exemptions aimed at addressing issues raised where the
mandatory CRM Fee might otherwise be considered “unfair, an impediment to competition or
otherwise compromise the attractiveness of FPS as a payment channel”. Pay.UK is consulting on
the proposals as currently made and this section should not be seen as setting out a
comprehensive list of alternative exemptions. Instead Pay.UK is identifying considerations about
the competitive effects and proportionality of the current UK Finance proposal by reference to alternative exemptions.
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(a) Transactions covered by the Code Payments Originating Overseas are described as being exempt because these transactions would not be covered by the Code. Such transactions are not the only types of transactions that are not covered by the Code. Notably, the Code covers customers who are consumers, micro-enterprises
and charities (referred to as consumers in this Call for Information for convenience). This means that no transactions by larger businesses would be eligible for repayment from the no blame fund, even though these transactions would be used as part of the basis for the calculation of funding the no blame fund. UK Finance states that excluding business to business payments was discounted because it would be difficult to implement.
This would mean that FPS Direct Participants with a disproportionately larger number of business transactions would cross-subsidise those FPS Direct Participants with relatively fewer business transactions. However, when considering those PSPs that compete to offer payment services to
businesses, all FPS Direct Participants will face the same CRM Fee and therefore the same increase
in cost for business transactions. Hence this might not be to the advantage of one PSP compared to another when competing for services to businesses. Since the CRM fee applies to business
transactions, the cost would be expected to be passed on to business users who may therefore be
likely to cross-subsidise to some degree the protection given to consumers.
(b) Low risk transactions Returns, FPS Direct Participants with no payment accounts, and FPS Direct Participants who only
allow payments to pre-set accounts are all proposed to be exempted because they are stated as
involving “a low risk of APP fraud”. Other types of transactions including payments to known
entities might also be thought to fall into a similar category of low risk transactions.
Not excluding such other low risk transactions could distort competition between FPS Direct
Participants with a disproportionately large number of low risk transactions compared to those with a disproportionately larger number of higher risk transactions.
Also, if the degree of fraud varies by type of FPS transaction and PSPs vary in their mix of such transactions, then this could lead to some PSPs cross-subsidising others.
7. Payback of short-term funding
As explained earlier, when the voluntary Code was launched, seven PSPs provided seed funding for the no blame fund for an interim period in respect of eligible ‘no blame’ claims received from 28 May 2019 to the end of 2019. The proposed FPS Rule change envisages that these contributions
will be repaid from the no blame fund once this is established, although the exact method by which this would arise has not been specified in the Change Request.
In respect of the interim period to the end of 2019, there were eight signatories to the Code of
which seven provided funding to the no blame fund. For the period of the interim fund, the seven
PSPs are able to request compensation to reimburse their customers where they have deemed that there is an eligible ‘no blame’ claim. Other Code Signatories can request compensation from the fund where they have contributed in this interim period or provided additional confirmation that they will abide by the rules of the interim fund for this period.
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There are currently more PSPs that use FPS than the eight signatories to the Code. The proposed rule would therefore appear to require PSPs that were not able to access the interim no blame
fund during 2019 to contribute to the cost of the interim no blame fund. The proposal is that the FPS Rule would also apply retrospectively, in that the CRM Fee would apply to fund a “historic” no
blame fund (i.e. the interim no blame fund).
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E. Operational and practical considerations
In this section we discuss how the proposed change would impact on the operation of Pay.UK and PSPs.
1. Operational implications for Pay.UK
As part of our assessment of the change request, we are considering the impact the proposal
would have on our organisation from an operational perspective.
(a) Impact on financial position.
The proposed change would not impact on Pay.UK’s overall financial position (including its regulatory reserves). This is because in the UK Finance proposal, Pay.UK is not expected to act as
a collection agent – the CRM Fee would not be paid to Pay.UK – or as Fund Administrator.
(b) Implementation costs. These include several elements, in particular the Pay.UK internal resourcing and any external costs involved in:
Performing the initial assessment of the Change Request and preparing this Call for
Information (including related engagement with UK Finance and with individual FPS
Participants in relation to the Change Request);
Carrying out the assessment (including regulatory, legal, economic and operational) of the
evidence and insights included as part of stakeholder responses to this Call for
Information;
Completing our own regulatory, legal and operational assessment of the Change Request
in light of those stakeholder responses, including assessing any impact in relation to
Pay.UK’s regulatory and legal position – this will include any considerations relating to
potential liability resulting from Pay.UK’s involvement in a voluntary consumer protection
mechanism and to the provision of system and PSP-specific FPS transaction data to
support a voluntary consumer protection mechanism; and
Subsequently, and depending on the outcome of that assessment, Pay.UK may decide to
proceed with the Change Request, which will involve drafting specific language to give
effect to the Change Request, including specific changes to the FPS Rules and to the FPS
Participation Agreement(s), and carrying out the formal consultation(s) of and
engagement with FPS Direct Participants and other relevant stakeholders, as appropriate,
in relation to those specific proposed changes to the FPS Rules and FPS Participation
Agreement(s).
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(c) Impact on “business as usual” staff and resourcing. Following implementation, Pay.UK would not expect there to be significant additional administrative costs for Pay.UK from the FPS Rule (and any changes to the FPS Participation Agreement(s)) being in place. The additional costs Pay.UK would incur ought to be limited to
ensuring the provision of data to the Fund Administrator and dealing with escalating any issues of non-compliance. (See further discussion below). It is unclear whether Pay.UK would apply the various exemptions, or would provide the granular data necessary for the Fund Administrator to apply the exemptions (i.e. with the data formatted in
such a way as to enable that exercise to be carried out). In both scenarios some work would be required by Pay.UK. To the extent data would need to be prepared by Vocalink (in its capacity as FPS central
infrastructure provider) to enable Pay.UK to provide data to the Fund Administrator, this may
trigger additional costs from Vocalink. Pay.UK would expect to recover any additional costs either through the FPS per click charging model (if appropriate) or from the Fund Administrator.
(d) The exemptions.
UK Finance has proposed a series of exemptions that it says are “designed to allow for new
entrants and exclude FPS participants with business models that are not impacted by APP fraud”. Pay.UK has asked some questions about the proportionality of these measures in the previous section of this Call for Information. From a purely operational perspective, Pay.UK considers that
these exemptions would be deliverable.
2. Operational implications for FPS Participants
As part of our assessment of the Change Request, Pay.UK wants to understand whether there
would be any operational costs (i.e. costs outside of the cost of paying the CRM Fee) or practical challenges for FPS Participants in meeting the requirement of the proposed FPS Rule. We would also like to understand whether the uncertainty over the future level of the CRM Fee creates any
challenge for FPS Participants. For example, Pay.UK would like to understand the tax implications for FPS Direct Participants (and, to the extent the CRM Fee is passed on to them, for FPS Indirect Participants) of being
required to make mandatory contributions to a voluntary no blame fund supporting a voluntary
industry CRM Code, as compared with the tax implications of alternative solutions such as self-insuring.
3. Administrative costs for the Fund Administrator
UK Finance has estimated that the cost of operating the interim no blame fund and the Fund Administrator will be around c.1% of the value of the no blame fund. This on-going cost would need to be recovered in addition to the contributions needed to fund the no blame pot itself. UK
Finance has run a procurement exercise to appoint the interim Fund Administrator which would
be expected to lead to a competitive price for these services.
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These costs appear to be based on solely the administration of the fund on a business as usual
basis. It is unclear whether any costs have been allocated for assessing over time whether exemptions remain appropriate and any changes that might be needed over time if the underlying
exemptions were altered.
The costs do not include any assessment of costs for payments sector Participants spending time engaging in discussions and consultations around the on-going relevance of existing exemptions,
or considerations of new exemptions.
4. Enforcement arrangements
For the overall arrangement to work effectively, all CRM Fees would need to be collected. As such there would need to be an appropriate mechanism in place to deal with situations where the CRM Fee is not paid by individual PSPs. To deal with this UK Finance has proposed the following
escalation process to deal with cases of non-compliance by an FPS Direct Participant. Please note that the Code signatory column lists a set of enforcement actions that would only apply to code signatories:
All PSPs Code Signatory PSPs only
Escalation within the relevant PSP to
CEO level by Pay.UK
Action by the LSB to expel the PSP from the Code. (if the
PSP is a Code signatory)
Discussion at the Pay.UK Participants Engagement Forum
External audit at the request of the LSB
Disclosure by Pay.UK that the
relevant PSP has not participated in the mandatory fee
