UK: Delays To Implementation Of Confirmation Of Payee Provide Banks' Operations Teams With Some Respite, But Leave Increased Exposure To Fraud Claims

Introduction

In its consultation paper of May 2019,¹the Payment Systems Regulator (PSR) announced changes to its plans for the introduction of Confirmation of Payee (CoP) by payment service providers (PSPs) in the UK from those originally proposed in its November 2018 consultation, in which the PSR had consulted on a general direction that all PSPs should be capable of receiving and responding to CoP requests by 1 April 2019 and sending CoP requests by 1 July 2019. 

Following consideration of responses to its November consultation, the PSR is now proposing:

• to give a specific direction only to the PSPs in the six largest groups that offer their UK account holders access to the Faster Payments Scheme (FPS) and CHAPS (i.e. Lloyds, Barclays, HSBC, RBS, Santander and Nationwide); and
• that those PSPs must (a) respond to CoP requests from 31 December 2019 and (b) send CoP requests and present responses to their customers from 31 March 2020.

Background

CoP is a name-checking service that has been identified by the PSR and banks as an important tool to help prevent APP fraud.  The service checks whether the name of the account to which a payer is sending money matches the name they have entered on their payment instruction and, along with the contingent reimbursement model (CRM), forms an important part of the overall plan to combat APP fraud.

Although most of the 43 respondents to the PSR's November consultation were supportive of its proposal to give a direction, certain potential difficulties were highlighted regarding:

• meeting the originally proposed implementation deadlines;
• the impact of the direction on different types of PSP; and
• the perceived lack of stability of the standards and guidance on CoP issued by Pay.UK (the body which has assumed responsibility for designing and delivering the technical standards of CoP from the Payments Strategy Forum).

The concerns in more detail

Taking each of these issues in turn:

Implementation timetable

Only three respondents to the PSR's November consultation supported the proposed dates.  Many said that their relevant teams were so heavily committed to implementing the changes brought about by Open Banking, PSD2 and Brexit that they could not deal with CoP in the timescales envisaged.

Some expressed concern that the proposed timetable left no spare time for testing before implementation, and others noted that the Pay.UK specifications and guidance were either not yet available to them or were unclear. There was also some concern regarding a lack of appropriate vendor products in the market, and some scepticism as to the ability of existing vendors to build CoP services in the time allowed.

As a result of these responses, the PSR's May consultation paper proposes the extended timescales mentioned above.

Impact on different types of PSP

Smaller PSP respondents pointed out that Pay.UK's CoP documentation was currently available only for phase 1 of its design roll-out, which only covers PSPs who operate accounts with their own unique addressable sort code.  Many smaller PSPs operate accounts that fall within phase 2 of the roll-out (the documentation relating to which was not available at the date of the consultation and whose release date had not yet been confirmed).

In light of this operational difficulty (and as those PSPs in the six largest groups cover, in the PSR's estimation, around 90% of FPS and CHAPS transactions as either the sending or receiving PSP), the PSR has decided to exclude those smaller PSPs from its direction.

The PSR recognises that there is a short-term risk that some fraud could move from PSPs that offer CoP to those who do not, but expects that "any such movement will be limited and will not materially undermine the benefits of having widespread coverage at the earliest practical opportunity" (paragraph 2.37).

Perceived lack of stability

At the time of the PSR's consultation, Pay.UK was still working on its CoP documentation, with its rulebook and operating guide, in particular, having been updated three times since the drafts were first issued in September 2018.  Pay.UK was also yet to draft the terms and conditions for participation in the scheme, and the pricing schedule and related direct debit instructions.

Notwithstanding this, however, on balance the PSR has taken the view that the relevant documentation is sufficiently stable to allow phase 1 accounts to be progressed towards CoP compliance.  Pay.UK has indicated that it does not expect to make any further material changes to its previously published materials.

Other feedback to the consultation

Various other issues were raised by respondents to the November consultation, such as whether the direction should cover only FPS and CHAPS transactions, or should be extended further to include BACS and SWIFT.  For various operational and technical reasons, including the fact that Pay.UK's CoP standard is not internationally agreed, the PSR has taken the view that the direction should cover only FPS and CHAPS at this time.

The PSR has also taken the view that its direction should apply to all payment channels (i.e. not just online and digital channels); that it should only apply when a new payment mandate is being set up or changed; and that it should cover both individual and business accounts.

Conclusion

The delay to CoP provides busy operations teams at banks with some further time to develop their implementation plans.  However, it also extends the period for which banks will be exposed to the risk of having to reimburse customers under the CRM without the benefit of one of the key protections designed to mitigate that financial exposure. All parties will therefore be keen to see CoP introduced as soon as possible.

Footnote

1 Payment Systems Regulator Consultation Paper CP19/4 – "Confirmation of Payee: response to the first consultation and draft specific direction for further consultation" (May 2019)

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