Forcing banks to refund victims of payment fraud ‘very complex’, finance official warns

Providing a legal entitlement to refunds for victims of authorised push payment (APP) fraud would be a “very complex legal issue”, a Department of Finance official has warned. He said it could create problems around competition and barriers to entry in the Irish banking sector,

APP fraud occurs when a person is tricked into willingly transferring funds directly into a fraudster’s bank account. There has been an increase in cases of APP fraud in recent years, with an estimated €16.8 million lost in Ireland 2021 according to Fraudsmart, the Banking and Payments Federation Ireland’s (BPFI) fraud awareness initiative.

Payment services in Ireland are governed by the European Union’s second payment services directive (PSD2), which was transposed into Irish law in 2018. While it provides for refund for victims of fraud via unauthorised transactions, there are no provisions obliging payment services providers to refund victims who authorised the transaction.

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Speaking before the Oireachtas Joint Committee on Finance, Public Expenditure and Reform and Taoiseach on Wednesday, Department of Finance official John Palmer said the department had looked into whether it would be possible to introduce domestic Irish legislation to cover APP fraud.

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“It is a maximum harmonisation directive; we can’t go beyond the provisions there… [but] if the directive doesn’t deal with a matter, and PSD2 does not deal with APP fraud, then there is the possibility that you could separately do domestic legislation,” he said.

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In the UK, legislation to allow for the development of a mandatory scheme to reimburse victims of APP fraud is in progress.

Mr Palmer said that introducing domestic laws in Ireland that do not conflict with the EU directive would be a “very complex legal issue”.

“We can end up with serious overregulation which may affect competition, which may affect new entrants and erect barriers to entry,” he said, noting that introducing legal burdens to refund all victims of APP fraud could discourage smaller payment service providers from entering the Irish market.

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On Wednesday, the European Commission published a proposal to modernise PSD2 and strengthen consumer protections within electronic payments.

It includes expanding refunds for APP fraud in the case of impersonation or where IBAN verification checks were not carried out properly, but did not go as far as to propose full liability for payment service providers to provide refunds for APP fraud.

In its impact assessment, the commission said it is unclear if introducing full refund rights for victims would result in a significant reduction in APP fraud, and “might only serve to reattribute the social cost of fraud without incentivising payers to avoid taking unnecessary risks”.