(Bloomberg) -- The payments industry is pushing back against the UK’s plans to force firms to reimburse scam victims, saying the maximum refund of £415,000 ($520,760) is “simply not proportionate” and could damage smaller fintechs. 

About 30 members of the Payments Association have signed a letter to the economic secretary to the Treasury, Bim Afolami, in a late challenge to the fraud rules that are due to come into effect in October. 

They say the maximum refund should be set at £30,000, which is closer to the average loss, according to a draft of the letter due to be sent on Wednesday. They also warn the refund systems might not be ready in time. 

A global surge in authorized push payment fraud, which tricks customers into moving their money to accounts controlled by criminals, has stoked debate and even lawsuits over who is responsible for the cost. These scams mostly lure victims over social media and caused almost £500 million in UK losses in 2022, according to the Payment Systems Regulator, which is implementing the new rules. 

Competition Fears

Compensation rates have varied widely among banks, with some agreeing to refund more than 90% of victims and others just 10%, the PSR has found. The new rules would split the cost between the institutions sending and receiving the scam payment. 

Companies, though, are warning about the work involved in the mandatory refund system and “there are significant risks to its cohesive delivery, which in turn risks poor and inconsistent consumer outcomes,” according to the draft letter seen by Bloomberg. “This threatens future competition and innovation in areas like open banking and digital challenger banking.”

Smaller providers including Monzo, Starling and Metro Bank Holdings Plc are among firms with the greatest proportion of APP scams, with over 100 frauds per million transfers sent, according to PSR data. 

Riccardo Tordera-Ricchi, head of policy and government relations at the Payments Association, said the reforms could undermine challengers’ ability to compete with high street banks. “We don’t want victims to fall for fraud, but the measures put in place have gone out of control.”

“We can’t continue to say we’re a global center for fintech if we are dropping the fintech center,” he said. 

The PSR plans “will create unnecessary uncertainty for early stage businesses,” said Michael Moore, chief executive officer of the British Private Equity & Venture Capital Association. “The regime could disproportionately impact the UK fintech community and those that invest in it, especially when compared to how APP fraud is being tackled in the EU and elsewhere.”

The European Commission has also proposed refunds for victims, with conditions around which types of fraud the banks need to reimburse and additional duties for communication platforms. 

Janine Hirt, CEO of trade body Innovate Finance, also highlighted the outsized risk for smaller firms. “Instead of a more proportionate threshold like £85,000, a £415,000 cap will only capture an additional 0.3% of claims but will have a disproportionate impact on firms given the potential size of the reimbursement,” she said. 

The PSR said the upper threshold was set after “extensive consultation” and mirrored the maximum that can be paid out for consumer complaints referred to the Financial Ombudsman Service. 

“By introducing our new reimbursement requirements, we’re significantly increasing protections for people,” a PSR spokesperson said in a statement. “We want to get to a place where all firms implement adequate preventative measures to stop the fraud from happening in the first place.” 

Finance executives have been calling for more to be done to stop fraud at its source. London-based fintech Revolut Ltd. has said the majority of UK scams reported on its app last year started their journey on Meta Platforms Inc. social media, with most money lost to “get-rich-quick” investment schemes. TSB found 80% of its fraud cases originated on Meta platforms such as Facebook, Instagram and Whatsapp.

The UK government is spending £400 million to tackle online fraud, and has said it is deploying 400 officers to combat the crime. It has also proposed changing the law to slow down certain payments, giving firms an additional 72 hours to investigate potential fraudulent transfers.

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