APP fraud – key new developments in regulatory and litigation spaces
Authorised Push Payment (“APP”) scams have become a big feature of litigation in the UK, largely as a result of their prevalence, with UK Finance recently estimating that £459.7 million was lost to APP scams in 2023. This type of fraud arises when a person is tricked into sending money to a fraudster posing as a genuine payee to a false bank account that is usually quickly dissipated afterwards.
It is no wonder then that both regulators and courts are keen to ensure that consumers are protected, especially when the rights of aggrieved parties to reimbursement from their bank, as well as the law on APP fraud, has not always been clear (see our previous perspective on the Supreme Court’s decision in Philipp v Barclays). We outline two key recent developments in the APP fraud space which may lead towards greater protection of consumers at large.
New PSR rules
7 October 2024 marked the start of major new regulatory protections for victims of APP scams. Under the Payment Systems Regulator’s (“PSR”) new rules, people making payment from one UK account to another will now benefit from greater levels of protection against APP fraud.
Payment firms are now required to follow the new reimbursement arrangements. For consumers, this means significantly greater protection, including:
- The vast majority of consumers can expect to be reimbursed within five business days of making their claim, with the new rules seeing over 99% of claims by volume covered.
- Payments up to £85,000 will be covered as standard, but banks and payment firms may still reimburse above that amount. This said, firms may also choose to apply an optional excess of up to £100, though this cannot be applied to vulnerable consumers.
- Receiving banks are obliged to respond to a sending bank’s requests for further information in connection with an APP fraud claim and must pay the sending bank 50% of the reimbursement that the sending bank has paid the customer.
The PSR warns that consumers should still make payments with care and where they are found to have been complicit in the fraud or grossly negligent they may not be eligible for reimbursement. However, the onus is on banks and payment firms to prove customers have acted with gross negligence, through ignoring specific, tailored warnings or not responding to reasonable requests for information, for example.
Terna Energy Trading v Revolut
In the case law context, the High Court’s recent decision in Terna Energy Trading v Revolut [2024] EWHC 1419 (Comm) is a positive development in the direction of broader protections for consumers in cases of APP fraud.
Background
In this case, the Court refused to strike-out or grant a reverse summary judgment application in a claim for unjust enrichment against a receiving bank. Terna sought restitution of €700,000 which it paid to a Revolut bank account held by a third party, Zdena Fashions Ltd, under the mistaken belief that it was satisfying a genuine invoice from one of its energy suppliers. The amount was entirely dissipated from the account shortly after.
Revolut argued that it was not enriched by the payment in question, and that, any enrichment would not have been at Terna’s expense. Its case was that there was therefore no real prospect of success of any claim to unjust enrichment.
Was Revolut “enriched”?
While Revolut argued that there was no enrichment, because the incoming credit to it was balanced by the obligation it undertook to its customer, the Court referred to a number of authoritative decisions on this point. These cases expressly confirmed that a bank becoming the debtor of a customer is not an answer to a claim in unjust enrichment.
The Court disagreed with Revolut’s purported distinction between its position as an electronic money institution (“EMI”) and that of an ordinary bank, as a bank can make use of its customer’s funds, while an EMI can only do so subject to additional restrictions or conditions. The Court highlighted that Revolut could have profited from holding the money in several ways, including keeping any interest paid on the segregated account.
On that basis, the Court held that it could not, at this stage, hold that Revolut had not been enriched. This was a matter for trial.
Was Revolut’s enrichment at the expense of Terna?
On this point, the High Court applied the principles from the Supreme Court decision in Investment Trust Companies v HMRC [2017] UKSC 29. The High Court noted that such cases can be divided broadly into two categories. These are firstly, more typical cases where the parties have dealt directly with one another, or with one another’s property. The second category is made up of cases where the parties have not dealt directly, but the defendant has nevertheless received a benefit from the claimant, and the claimant has suffered loss through that benefit.
The present case fell within the latter category, given that there had not been a direct payment. Regarding indirect transfers, the Court noted that in line with Investment Trust Companies they may nevertheless be treated as if they were direct transfers, either as a result of agency or because they are a “set of co-ordinated transactions”. On either of these bases, the Court held that for the purposes of the summary application the transfer involved an enrichment of Revolut at the expense of Terna, by indirect transfer sufficient in principle to satisfy the doctrine of unjust enrichment.
This finding was expressly made subject to questions of “unjustness” and any possible defences, which could, again, only be determined at trial.
Comment
These regulatory and case law developments in the APP sphere are both helpful for consumers, strengthening their ability to claim reimbursement of lost funds from banks. The new PSR rules have put in place a straightforward framework for eligible consumers to be reimbursed within a short timeframe up to the maximum amount covered by the scheme. Having said that, the £85,000 cap is significantly lower than the level that previously proposed – £415,000 – and Which? and other consumer groups have pointed out that this will leave consumers exposed given so many losses are in excess of the cap.
The High Court’s decision in Terna demonstrates the courts’ willingness to allow an unjust enrichment claim in an APP fraud to proceed to trial, where there is a real prospect that the claimant can prove that the bank was “enriched”. This was the case here even though the funds received were matched by an immediate balancing liability on the receiving bank to its own customer. Additionally, the Court was willing to depart from earlier High Court decisions including Tecnimont Arabia Ltd v National Westminster Bank plc [2022] EWHC 1172 (Comm), to find that, for the purposes of the summary judgment application, the enrichment was arguably at the expense of the claimant. Having said that, this was only summary judgment and the matter is now, we understand, proceeding to a full trial.
Given the volume of these types of fraud and the current conflicting case law in first instance decisions, it is no doubt only a matter of time until we see further appellate consideration of these principles. However, in the meantime, both the new PSR rules and the decision in Terna will be cautiously welcomed by aggrieved parties who have been unwitting victims of fraud.