1. APP fraud continues to grow in the U.K. It typically involves a victim being induced into transferring money from their personal bank account into an account operated by the fraudster. The Payments Systems Regulator (‘PSR’) which oversees the system of banking transfers in the U.K., estimated that in the first half of 2023, some £240 million was stolen by way of such scams.
2. In July of this year the Supreme Court, in Philipp (Respondent) v Barclays (Appellant), declined to expand the common law Quincecare duty (under which a bank owes its customers an implied contractual duty to protect them from the fraudulent conduct of the customer’s agents) to cover the victims of APP fraud.
3. The Philipps had been persuaded by sophisticated thieves posing as employees of the National Crime Agency to transfer the bulk of their life savings (£700,000) to companies based in the UAE. The bank had asked the Philipps whether they really wished to make such transfers but its concerns went unheeded. Once the Philipps realised the money had been lost, they then tried to sue their bank by seeking an extension of theQuincecare duty. They maintained that a bank should refuse to follow its customers’ instructions if it suspected that its customers were victims of APP fraud. The High Court had struck out the claim on the basis that the bank owed no such extended duty. The Court of Appeal reversed the High Court but the Supreme Court unanimously reinstated the status quo ante. The nub of the Supreme Court’s reasoning was that so long as the instructions are clear and provided by the customer personally (or by an agent with apparent authority) then the bank is duty bound to execute the instructions without further enquiry. [1]
4. Whilst the Courts have not acted to save consumers from folly, Parliament has stepped in. At the moment, there is a voluntary code operated by at least 10 retail banks which have agreed to provide up to 50% recompense to victims of APP fraud in the U.K[2]. The Banking Reform Act 2013 has been amended by the Financial Services and Markets Act 2023 and now mandates the PSR to impose a new obligatory code on all retail banks operating in the U.K. The proposed implementation date is October 2024.
5. Under the new legislative APP victims (which includes small businesses and charities) will potentially be able to recover from their bank an amount greater than 50% of their losses –so long as the victim’s money was not transferred to an overseas bank account. The precise formula for the level of reimbursement is yet to be finalised but once the quantum is determined in each particular case, it will involve a 50% contribution from the sending bank and a 50% contribution from the receiving bank and the overall compensation will be subject to a cap.
6. Reimbursement will also be contingent on (1) the customer not being involved in the fraud themselves and (2) exercising the ‘consumer standard of caution’.
7. The consumer standard of caution is to be evaluated by reference to (i) a requirement to have regard to specific warnings about scams or about specific transactions (ii) a requirement to notify the bank promptly of the fraud and (iii) a requirement to share relevant information about the fraud with the bank.
8. The burden of proof will be on the bank to demonstrate that a consumer has, through ‘gross negligence’, not met one or more of these three requirements. ‘Gross negligence’ is to be interpreted to a higher standard than the standard of negligence under common law. The consumer needs to have shown ‘a very significant degree of carelessness’. It is not known what this means in practice and it would be interesting to see some examples.
9. In addition, those consumers deemed ‘vulnerable’ to a particular APP will not be required to exercise the consumer standard of caution. ‘A vulnerable consumer is someone who, due to their personal circumstances, is especially susceptible to harm – particularly when a firm is not acting with appropriate levels of care.’ However, no examples have yet been provided as to what such vulnerability looks like in practice.
10. The new reimbursement initiative therefore poses a number of tricky issues for the banks. Firstly, given the propensity of consumers to fall victim to all manner of incredible schemes, the application of ‘gross negligence’ and ‘vulnerability’ may prove to be controversial in practice.
11. Secondly, the mandatory provision of such a safety net may encourage consumers to become less (rather than more) careful when dealing with their money because expectation of recompense may well become entrenched. This is the so-called problem of moral hazard which runs contrary to the UK regulators’ statutory duty to encourage consumers to take responsibility for their actions.Finally, once the new code is up and running, it will be intriguing to see how stringently or consistently it is applied by the retail banks. The oversight mechanism is yet to be developed but it would appear that dissatisfied APP victims will not have a direct cause of action against their bank – rather they will have to take their complaint to the PSR. Any person affected by an enforcement decision of the PSR can appeal to the Competition Appeals Tribunal (‘CAT’).
12. It therefore seems that there is scope for legal advice and assistance at the following stages (i) the initial complaint to the bank (ii) any referral of the bank’s decision to the PSR and (iii) any subsequent appeal to the CAT. One can also envisage the need for collective redress if large numbers of consumers affected by the same scam have been dealt with in an unsatisfactory or inconsistent way. Given the sheer volume of APP fraud and the likely desire of the banks to minimise reimbursement, it would seem sensible for the PSR to hire more staff to deal with a potentially heavy case-load of future complaints from individuals or groups.

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[1] The Supreme Court did leave the door open for the Philipps to pursue a loss of chance claim against the bank (which was premised on the basis that it should have acted sooner to try and reverse some of the transfers) but the Court expressed some doubt as to the viability of this surviving claim.

[2] The voluntary code did not apply to the Phillipps as it only covers intra U.K. money transfers.

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