An open letter from Tide’s CEO welcoming the government’s new Fraud Strategy but…

… more needs to be done and fraud-accelerating reimbursement proposals risk offsetting its impact 

• Context
• The government’s new Fraud Strategy
• The reasons why reimbursements will encourage scams
• Tide’s call to action

Fraud is a blight on the UK, its small businesses, consumers and financial institutions. 

The universality of the English language (allowing fraudsters from around the globe to target the UK), too little prevention by social media and telecoms companies (where most scams start) and a lack of capacity within the police (who only investigate a small minority of frauds) are widely recognised as the root causes. This has resulted in an environment in which fraud pays and there are minimal consequences for the perpetrators.

Tide is committed to fighting fraud, and has already been investing heavily in combating this scourge. We look forward to building on many of the measures the government will be putting in place, following the announcement of its new Fraud Strategy.

We share many of the views of experts that the government needs to avoid offsetting the positive impact – including the £400 million investment for the police and other agencies to fight economic crime – by inadvertently encouraging scams through fraud reimbursements.  

Context

Fraud causes enormous harm and puts stress on small businesses, consumers and financial institutions – and in the process, this damages the UK’s economy. 

In the first half of 2022, criminals stole £610 million through scams, according to UK Finance, a trade association for banking and financial services. These scams, also known as Authorised Push Payment (APP) fraud, where a victim is tricked into handing over money to an account, are a particular threat. 

The problem with these types of scams is that they can’t be reliably detected by financial institutions with the limited data we have when a payment transaction is initiated. The only time a financial institution can reliably determine whether a customer has fallen victim to a scam is if the account or transaction is blocked and investigated. 

Because of this limited data, many of these blocks turn out to have been false alarms once they’ve been fully investigated. Understandably, customers are upset that they need to provide information and have their accounts or transactions blocked while they try to go about their normal business. This is the single biggest source of customer complaints.

In other words, financial institutions like Tide are stuck between a rock and a hard place. On the one hand, we want to do, and are doing, our part to prevent scams – and on the other, if we block more accounts and transactions, we know we will upset more of our members.  

We continue to invest massively in advanced machine learning models and other measures, but the truth is that our experts estimate that a material part of such scams cannot be detected.

This is why it is so important that the government steps in to drive prevention and law enforcement.

The government’s new Fraud Strategy

The government’s new Fraud Strategy outlines a host of measures to prevent fraud, including: 

• Obligations of the tech sector: User-to-user platforms, essentially social media, will be required, by law, to put systems in place  to prevent fraudulent content appearing on their platforms (through the Online Safety Bill).

• A ban on cold calls on financial products will be introduced so fraudsters can’t dupe people into buying financial products.

Tide welcomes these two initiatives and is eager to see them develop.

The government also recognises the importance of law enforcement to actively pursue criminals through two key measures:  

• Replacing Action Fraud: The government is investing £30 million over three years to turn Action Fraud into a state-of-the-art reporting centre. There will also be a portal, so victims can receive timely updates on the progress of their case.
• A new National Fraud Squad is being created with 400 new investigators focusing on high-end fraud and organised crime (to a total of 500) – jointly led by the National Crime Agency and City of London Police.

Tide believes these two initiatives have real potential as they will finally start holding criminals to account. Every one of these scams ends in bank accounts that are held by someone: a natural starting point for investigation. However, with an estimated 2.7 million scams, the government needs to dedicate more than 500 officers to fighting fraud. 

Unfortunately the government has engaged, but not yet adopted the advice of industry experts, like Tide, who have warned that reimbursements encourage scams.

• Reimbursement: The Payment Systems Regulator will have the power to mandate financial institutions (technically referred to as Payment Service Providers, or PSPs) to reimburse victims, irrespective of whether such fraud was preventable or not. 

The reasons why reimbursements will encourage scams

Leaving aside the question of whether it’s appropriate to ask financial institutions to reimburse scams they didn’t cause and for the most part they can’t prevent, the real issue is that further incentives are created for fraudsters to commit scams. This risks offsetting the government’s prevention and law enforcement efforts. 

• With customers no longer expected to carefully consider the services, goods and other items they’re buying, they will naturally lower their guard, the most important first line of defence against scams is being removed – allowing fraudsters to succeed much more easily in their scams.
• Additionally, first party fraud is also likely to rise significantly, e.g. “victim-pretence” (fraudsters acting as victims), “fraud-muling” (victims colluding with fraudsters for a share of the APP fraud reimbursement proceeds), or through “soft fraud” (e.g  claiming APP fraud reimbursement on genuine purchases, for goods they’ve bought that did not meet expectations). 
• The shift in liability and the increased fraud levels will pose a cost that will ultimately need to be passed on to customers. Financial institutions will need to pass on these reimbursement costs. The reimbursement rules effectively create a “tax” on all users and will increase the cost of payments either directly, or through other charges, by financial institutions. In essence, all customers will be asked to pay for those customers that are being reimbursed.

• Extensive blocking of accounts and payments by payment providers will cause severe customer detriment to UK SMEs.

• This customer detriment will translate into damage to the UK economy. Blocking  at scale has the potential to lead to “an effective end of faster payments”, as some in the industry have called it. The delays in being paid will lead to more businesses failing as their cash flow comes under further pressure.

Tide’s call to action

The government’s Fraud Strategy is very helpful and Tide will work hard to deliver its part.

However, we call for four policy enhancements that will make a material impact on fighting fraud:

Mandatory data sharing to prevent fraud by expanding the existing Confirmation of Payee. Confirmation of Payee, an existing service that allows us to check whether the name of a payee matches the account and sort code details provided, should be extended. This service can make a vital contribution to prevent fraud:  

• Mandating all financial institutions (technically Payment Service Providers) to take part in Confirmation of Payee, as currently not all of them are;
• Mandating Payment Service Providers to add risk assessment data (e.g. how long the payee has been a customer, how many non-fraudulent transactions they have undertaken);
• Mandating social media and telecommunications companies to maintain adequate records of all their advertisers and users and contribute to Confirmation of Payee data by linking in their records.

Zero tolerance law enforcement policy funded by an anti-fraud tax. The UK should adopt a zero tolerance stance on those that commit scams:

• Mandatory reporting to the police of all instances of fraud by financial institutions
• Mandatory investigation of all fraud by the police;
• Introduction of an anti-fraud tax on the value chain to fund the required law enforcement capacity; from online ads to telecoms to payments. 

No encouragement of fraud by reassessing the mandatory reimbursement proposals. For the reasons outlined above, we should not encourage more fraud. If the government insists on bringing this in, the industry will need more time to prepare given the expected increase in fraud levels.

Giving customers a choice about the level of fraud protection they seek. This will empower sophisticated customers the opportunity to opt out of fraud controlling account and transaction blocking.

Tide will continue its work with agencies, including law enforcement (such as the Police and the NCA), CIFAS, UK financial trade bodies (such as UK Finance, StopScams UK and Innovate Finance), amongst others, to ensure our members and their money are protected. Combating fraud is a relentless focus for us and we are committed to real and lasting action in this area.