Banks to gain new powers to freeze large payments for fraud checks

UK banks are soon set to get new powers to freeze large payments for up to four days as part of updated fraud prevention measures due to come into force this autumn.

The changes come ahead of a new anti-fraud regime coming into effect on October 7, which will require banks to reimburse almost all victims of “authorised direct payment” (APP) fraud – a type of fraud that cost consumers £460m last year.

Currently, banks are only allowed to hold authorised payments, which have been approved by the customer, for up to 24 hours while investigations are being conducted. However, the new legislation will extend this period by an additional 72 hours, but only if there are reasonable grounds to suspect fraud or unusual activity that is inconsistent with the customer’s normal financial behaviour.

The legislation, originally proposed by the Conservative government and backed by Labour earlier this year, will go before parliament this autumn. A Treasury source confirmed the new rules, describing them as an additional tool to combat fraud. Bim Afolami, the city’s then-minister, referred to the measure as “another weapon in our anti-fraud arsenal”.

However, some legal experts warn that the extra bureaucracy could cause significant disruption, particularly for those moving homes. Gareth Richards of the Association of Licensed Solicitors commented: “We believe that there are already sufficient steps in place to enable banks to identify unusual or suspicious activity in accounts under their control.”

The introduction of the powers comes as the financial sector prepares for controversial new rules that will require banks to compensate all victims of app fraud from October. App fraud includes scams such as romance scams, fake purchase schemes and investment scams.

Under the new guidelines from the Payment Systems Regulatory Authority, victims will be eligible for refunds unless they ignored warning letters from their bank, delayed reporting the fraud to the bank, refused to share details of the fraud with the bank or the police, or acted with gross negligence. Vulnerable customers will get additional protection, making it harder for banks to refuse refunds. The maximum liability banks will face under the new system will be capped at £415,000 per case.

More than 480 businesses have already signed up to Pay.UK, the company overseeing the scheme, which will be funded in its first year by a levy on transactions made through the Faster Payments system. Banks and payment providers were required to sign up by August 20, with Faster Payments sending reminders to businesses that had not yet complied.

Previously, banks could voluntarily commit to a conditional compensation model agreement to compensate victims of APP fraud. In 2018, before the voluntary system, compensation rates were around 19%, but it rose to 62% by 2022.

The Treasury Department declined to comment on the new measures.