And in this matter, it was held that the contract between a bank and its customer is subject to an implied term, that the bank will not execute its customers orders if they are put on inquiry that the instruction may have been given dishonestly and could have been an attempt to misappropriate funds. If the bank has reasonable grounds for believing that this instruction is an attempt to misappropriate funds and will be held to the standard of an ordinary, prudent banker and may be required at the very least to refrain from executing the order. So this duty has recently been brought to the fore with the increase in fraudulent scams.
One area that this is perhaps becoming more prevalent is the APP fraud space. So Julie, if I hand over to you, perhaps you can give us a quick run through on what APP fraud is.
JULIE BAKER: Sure thank you, Kelly. Yes, so authorized push payment fraud happens when a person or a business is tricked into sending some money to a fraudster who's posing as a genuine payee. And these types of scams, they really have a devastating impact on the person that's the victim of them. With the advent of faster payments, the payment is immediate. So it's almost impossible to get your money back once you realize you've been scammed.
And anyway, once the fraudster receives the money, it typically would go through lots of different bank accounts in a process known as layering. So it's almost impossible to trace as well. Now, the fraudster tricks the person by social engineering, but with APP compared to other types of social engineering, the victim actually authorizes the payment.
Now, a well-publicized example of this is the Hey Mom WhatsApp fraud, which you may have seen on TV or in the papers. And this goes along the lines of a son or daughter at university sending a WhatsApp message to their parents along the lines of, hey, Mom, I've got a new phone. Please delete my old number.
I'm updating all of my apps on my new phone and due to security, my banking app takes a couple of days. Unfortunately, I've got a few bills to pay and I wondered if you could just send me a bit of money to tide me over, and I'll pay you back. So these are the types of frauds that are happening quite regularly.
KELLY WILCOX: Thank you, Julie. I mean, I'm sure I can speak for most of us when I say we've all probably experienced something similar landing in our email inboxes and these scams can be devastating for people who do fall for them. However, what implications does this have for banks, Julie?
JULIE BAKER: Well, the types of fraud that we're seeing, and the WhatsApp one is a typical one, they're typically low value but high frequency. So for banks at the moment, these will probably fall well within their self-insured pretensions. But as we look into more sophisticated investment type frauds, the amounts could be much larger, and then the banks might turn to their professional indemnity policy to try to seek recovery.
KRYSTA PRESTNEY: As you mentioned, Julie, there's been a recent increase in scams and during lockdown, we saw a rise in scams coupled with an increase in their sophistication and I think criminals use the pandemic to target victims online.
In 2020, APP fraud losses were up 5% from the previous year, and just under half of the losses were returned to victims. However, this was over 75% more than the sum returned in 2019. So it feels as though, it isn't a surprise, given these figures, that some of these matters have now made their way to the courts, and there is one case in particular, Kelly, that's got us all talking.
KELLY WILCOX: Yes, Krysta. So there certainly is, one that's got those in the financial services sphere, I suppose, on tenterhooks and that's the case of Phillips and Barclays Bank. There has been, fair to say, a fair amount of case law that deals with the Quincecare duty.
But this case in particular is of interest because unlike other cases, Mrs. Philips authorized the transaction in question herself. It didn't involve an agent of a corporate customer and it's here where I think there is some concern that the duty can be extended.
In terms of the facts in this matter, Mrs. Philips was a victim of an APP fraud scam where she was coerced by a fraudster claiming to be from the FCA to transfer around 700,000 from her Barclays account. On discovering that this was fraud, Mrs. Philips brought a claim against Barclays. The High Court held that the Quincecare duty should be limited to protecting against the risk to a corporate customer of eternal fraud, as opposed to circumstances where a customer approves the instruction themselves.
The court did express sympathy in this matter, but ultimately held at no duty was owed. Mrs. Philips appealed the high court's decision and the case went to the Court of Appeal. In contrast with the high court, the Court of Appeal determined that the Quincecare duty of care was not limited to instructions given by a customers agent and held at the Quincecare duty could potentially arise in any case where a bank is actually put on inquiry.
So this judgment is going some way to widen the goalposts with the rise in APP fraud. I think it's important to understand the implications for banks. Krysta, what do you think the implications of the judgment are for banks? And what do you think we will see as a result of this?
KRYSTA PRESTNEY: Yeah, thanks, Kelly. So the Court of Appeal judgment, as you mentioned, held that the Quincecare duty doesn't depend on the fact that a bank is instructed by an agent of the customer. So that decision has extended the scope of the Quincecare duty beyond its established boundaries in quite a significant extension. And it provides that it's possible that a duty of care could arise in the case where a customer themselves, who is the victim of an APP fraud, instruct the bank to make a payment. So quite a departure from the original understanding of Quincecare.
Following the Court of Appeal judgment, Barclays applied for permission from the Supreme Court to appeal the Court of Appeal decision. Permission was granted at the end of 2022 and the appeal was heard on the 1st and 2nd of February 2023. We now await the Supreme Court judgment, which is unlikely to be handed down for at least 12 weeks from the appeal date.
So whilst Philip is the headline case here, there have also been numerous other recent claims regarding the Quincecare duty. However, most of those other claims do not involve APP fraud as is the case in Philip. So I think until the outcome of Philip is confirmed, I think there's likely to be some uncertainty in how banks manage these claims. But this really is an interesting and an important case, which I think banks will be watching closely.
I've also heard anecdotally that banks are seeing reference to Philip in claims being received. So I think banks are likely to be taking a more cautious approach to cases whilst there remains uncertainty in their duties. So even in circumstances where banks may usually have expected to succeed, for example, on a strikeout application, the reality of actually striking out these claims in light of the Phillip Court of Appeal judgment is probably a less attractive and riskier proposition, particularly where this judgment may be indicative of a more consumer-friendly focus in the area.
KELLY WILCOX: That's really interesting to note, Krysta, actually, on the cautious approach. I suppose this could also be echoed by insurers when dealing with a claim that has the potential to potentially exceed a bank's PI retention, potentially could go some way to influencing any potential strategy. It's therefore important for banks to liaise with their insurers in regards to any potential strategy for dealing with such claims. I mean, Julie, do you think this will change how insurers deal with risks at the placing in stage 2?
JULIE BAKER: I do, yeah. The potential for extending the duty is certainly a high profile issue for the banks as well as for their insurers. And I'm sure that the insurers will be watching these developments very closely, not least because there is a potential to open up the floodgates for claims which they might not have been considering when setting the terms. So if banks are ultimately held liable for these losses, then we can expect many additional questions at the placement stage.
They're likely to ask the number of losses and trends that banks may have suffered and what protections they have in place to prevent these kind of frauds happening in the first place. And of course, ultimately, this may have an impact on pricing and also on the scope of coverage they're prepared to provide.
KELLY WILCOX: I'm sure we can all agree here that clarity is needed for all parties in this area, really. And given it the extent of the duty is far from clear based on current case law, do you think this regulation will help clarify the duty and what do you think we might see next in terms of legislation and regulation, Krysta?
KRYSTA PRESTNEY: I certainly think that legislation will provide some certainty to banks in managing APP fraud and the financial services markets bill was introduced to parliament in July 2022 and if that's accepted, it will enable regulatory action by the payment services regulator to require banks and other payment service providers to reimburse APP scam losses.
Now, the PSR is-- well, its aim is to significantly reduce APP scam losses by actually trying to prevent APP frauds from happening at all. But where that's not possible, they want to ensure that victims who have acted appropriately have their money returned to them.
JULIE BAKER: Yes, just to expand on that point, when the PSR consulted last year, the measures they put forward include mandatory reimbursement for victims for all online and mobile payments and this of course, is a significant step forward from the voluntary code that currently exists. So reimbursement will be for all payments over 100 pounds and subject to an excess of no more than 35 pounds and there is no upper limit on the amount that can be reimbursed.
So the payment services regulator is actually seeking to impose a mandatory reimbursement as soon as this bill receives Royal assent.
KRYSTA PRESTNEY: Yeah, I think it's also worthy of note here that the PSR's mandatory reimbursement requirement if it is approved will have limited application. But I think depending on the outcome in Philip, that judgment could be far wider reaching and could include commercial customers, whereas the PSR will not. Julie, do you think the Financial Services and Markets Bill will be welcomed by the industry, given that it will provide some certainty by way of a mandatory reimbursement code?
JULIE BAKER: Yeah, I mean, it will certainly provide the long-awaited clarity and in the absence of a final decision on Phillip or the implementation of the Financial Services and Markets Bill, there will currently be difficulty in having any settlements settled by insurers under the current voluntary code as this is unlikely or at least difficult to trigger under a PI policy. However, if the new bill is passed, this will change everything.
The proposed requirement for mandatory reimbursement will establish a legal liability on the part of the insured, which could then be enough to trigger the relevant clauses under a PI policy. So yes, certainly, it will be a change.
KELLY WILCOX: I mean, Julie, given the low threshold of 100 pounds, this is probably unlikely to exceed most banks PI retentions. If recent case law legislation has the effect of opening the floodgates to these claims, is there any way banks can protect their bottom line from potentially a flurry of smaller value claims that will not impact their insurance policy?
JULIE BAKER: Yeah, I mean, it's key that the banks understand their risks and controls and ensure that they are adequate to protect against this type of losses. I think that's probably first and foremost. They should then liaise with their brokers to see how we can assist.
And it's worth reviewing your professional indemnity policy wording, and in particular, the aggregation language within there. If there's a potential to aggregate a number of small losses together, this could have the effect of exceeding the professional indemnity retention and thus seek indemnity from insurers. There was also a significant amount of interest in protection of scam victims by consumer watchdogs and the FOS. What are these bodies seeing in the APP fraud space?
KELLY WILCOX: I agree. I think there is a drive to do more to protect consumers and outside of the court process, APP fraud cases are also dealt with by the financial ombudsman service. And these complaints are rising. So complaints about APP fraud increased by around more than 20% in the year 2021 to '22 and FOS upheld around 3/4 of these complaints in consumers favor.
I think a lot of this, as we discussed earlier, is due to the rise in scams during the COVID pandemic. Also, given the current economic climate, I think the FOS may be more sympathetic towards victims. So in terms of the process, taking complaints to the FOS means consumers can seek remedies without having to pursue expensive litigation.
Although the sums involved in the Philip case that we've discussed were significant, many APP fraud scams would involve much smaller sums. Therefore, the ability to seek remedies through the FOS at a fraction of the cost of litigation coupled with the expansion of the Quincecare duty could see banks exposed to a flurry of smaller complaints. Depending on the facts of the complaint and going back to Julie's point about the aggregation language in the bank's insurance policy, these complaints may be unlikely to exceed a bank's policy retention.
In the absence of a mandatory code, it may be for banks to consider whether it may be more cost effective to refund customers with smaller claims to avoid cost of litigation or incurring the false case fee as payable by firms. However, the need to seek redress through the FOS may become less frequently utilized, given the measures proposed in the Financial Services and Markets Bill. It'll be interesting to see ultimately how the market responds to these new proposals.
So I think it's safe to say there is a lot to consider in this area, both the banks and their insurers and I'm sure they are waiting with bated breath as we for the outcome of the Philip appeal. So look out for more from us on this as developments occur.
That just leads me to say thank you, Julie and Krysta. This has been an interesting conversation on APP fraud. In light of the recent Phillip developments, we've touched on some important developments and how these are impacting banks and their insurers and I think we agree that there's much more that we could discuss on this topic and no doubt we'll be following up throughout the year as more developments occur. So watch this space.
KRYSTA PRESTNEY: Thank you both. It's been a really interesting discussion. And there is some significant change on the horizon in this space which I'll be watching with interest.
KELLY WILCOX: Thank you for taking the time to listen today. Please look out for future podcasts from the WTW FI team.
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