Potential Changes with UK Liability Shift and Downstream Impact to Financial Institutions’ Fraud Programs

Chen Kirsch, Global Manager Consulting and Fraud Advisory & Ian Church, Principal Business Consultant, Enterprise Consultancy and Advisory Practice
Potential Changes with UK Liability Shift and Downstream Impact to Financial Institutions’ Fraud Programs

In an era marked by technological advancements and increasing cyber threats, financial institutions (FIs) play a critical role in safeguarding their customers and the integrity of the financial system from fraud and money laundering. The forthcoming implementation of the UK fraud liability shift marks a significant step towards making FIs more accountable for fraud and bolstering fraud prevention measures. We will explore the implications of this shift from the FI’s perspective, highlighting the opportunities and challenges it presents in the battle against fraud. 

The UK Payment Systems Regulator (PSR) has released the proposed regulation on June 7, 2023 in response to the increasing number of APP fraud scams. In 2022, there were over £485.2 million in losses due to APP fraud in the UK alone according to UK Finance, with some predictions estimating it would more than double by 2026. 

With the PSR expanding liability to FIs receiving fraudulent payments, mule detection becomes even more critical. With the liability shift, FIs face increased responsibility for identifying and preventing such activities and face financial implication if they fail, increasing their potential fraud losses and reputational damage. Implementing robust mule detection systems and strategies is essential to mitigate the risks associated with these fraudulent activities. 

Advanced analytics, artificial intelligence, and machine learning algorithms can help FIs identify patterns, anomalies, and suspicious behaviours indicative of mule accounts and prevent funds received through fraud from leaving the account, reducing an FI’s own liability and therefore exposure. Mule detection not only safeguards FIs from financial losses and organized crime but also helps protect innocent individuals from becoming unwitting accomplices in fraudulent schemes that we increasingly see these days. 

It is crucial for FIs to invest in comprehensive mule detection mechanisms and collaborate with other FIs, law enforcement agencies, regulatory bodies, and stakeholders from other industries such as telecommunications and social media platforms where mule recruitment is allegedly the highest to combat this aspect of fraud effectively and safeguard FI’s brand reputation. By doing so, FIs can strengthen their overall fraud prevention efforts, mitigate risks, increase compliance to anti-money laundering legislation and uphold the integrity of the financial system. 

FIs should take the liability shift with extreme seriousness—with the implementation of the fraud liability shift and the inclusion of inbound fraud liability, FIs are poised to play a pivotal role in protecting their customers and the wider financial system or must be prepared to incur more significant fraud losses due to increased fraud liability, operational impacts due to complicated claims management, and customer attrition due to loss of trust. By embracing this shift correctly, however, FIs can strengthen their security measures, build robust partnerships, enhance customer trust, differentiate themselves in the marketplace, and reduce their fraud loss. While challenges remain, proactive adaptation and a collaborative approach to fraud prevention will enable FIs to navigate the evolving landscape of fraud successfully and ensure a safer future for all stakeholders involved. 

Embracing the Fraud Liability Shift:

For FIs, the fraud liability shift introduces a new paradigm in fraud prevention and liability management.

  • Reinforced Security Measures: The fraud liability shift creates a stronger incentive for FIs to invest in improved security measures and fraud detection systems, monitoring both outgoing and incoming payments. By assuming liability for certain fraud-related losses, FIs are motivated to strengthen their processes, fortify their infrastructure. and continuously evolve their fraud prevention and mitigation mechanisms. This commitment ensures a robust line of defence against new and emerging fraud techniques.
  • Strengthened Partnerships: The fraud liability shift fosters collaboration between FIs and businesses. Financial institutions can work closely with trusted business partners, to share insights, knowledge, and best practices. By joining forces, FIs and businesses can establish a united front against fraud, benefiting from a collective intelligence that enhances fraud detection and mitigation capabilities.
  • Enhanced Customer Trust: Fraud incidents often erode customer trust and confidence in FIs. However, the fraud liability shift allows FIs to demonstrate their social commitment to protecting customers. By proactively addressing fraud risks and compensating customers affected by certain types of fraud, FIs can rebuild and reinforce trust, cultivating long-term customer relationships.
  • Competitive Advantage: FIs who proactively embrace the fraud liability shift can use that to differentiate themselves in the market. Demonstrating a robust commitment to fraud prevention and assuming liability for fraud-related losses enhances the FIs reputation as a trusted financial institution. This in turn, can attract new customers, retain existing ones, become known as a harder target for fraudsters, and create a competitive edge in an increasingly security-conscious marketplace.
  • Regulatory Compliance and Reputation Management: Adhering to the fraud liability shift regulations ensures FIs remain compliant with evolving industry standards and government mandates. By upholding regulatory requirements, FIs mitigate reputational risks associated with fraud incidents, which can have long-lasting impacts on brand perception. Compliance demonstrates an FI’s dedication to protecting customers and maintaining a secure financial ecosystem.

Navigating Challenges:

While the fraud liability shift presents numerous opportunities, FIs must be mindful of the challenges that lie ahead. Key considerations include:

  • Operational Impact: FIs must adapt their operational processes to accommodate the liability shift effectively. This involves developing more robust risk assessment, increased fraud and mule monitoring and internal process controls to identify and mitigate potential vulnerabilities. This includes hardening onboarding processes, early account monitoring and ongoing monitoring to identify legitimate accounts becoming mule accounts. It would also expect to increase the size of the operational departments for repatriations when the FI receives funds, and increased investigation team size and costs. New customer contact strategies would need to be created for suspected mule alerts that would pass AML regulatory constraints. All this should reduce the increase in fraud exposure and reimbursement costs expected due to this legislation.
  • Continuous Adaptation: Fraudsters continuously evolve their tactics, demanding FIs to stay one step ahead. FIs need to invest in multilayered technologies, advanced analytics, and machine learning algorithms to detect and prevent emerging fraud patterns promptly. Ongoing employee training programs and collaborations with industry advisory experts are essential to keep abreast of the latest fraud trends and prevention techniques. Ensuring seamless integration of new technologies and systems is crucial to maintain uninterrupted services and adapt in an agile manner, while minimizing any operational disruptions.
  • Customer Education: FIs must communicate the implications of the fraud liability shift to their customers effectively. Educating customers about fraud, the new regulations, the protection provided, and the collaborative nature of fraud prevention cultivates a shared responsibility in combating fraud. By empowering customers with knowledge, FIs can foster a vigilant and security-conscious customer base.
  • For non-UK banks: as discussed in previous articles, we have seen in the past that when legislation is put in place for fraud in the UK, it tends to propagate across countries. We are now seeing in Europe some countries actively issuing fraud reimbursement legislation like the UK for non-customer-initiated fraud while many more countries globally such as the US and Australia are actively taking steps toward passing such legislation. As such, we predict that the legislation we are now seeing with the newest PSR announcement, geared toward complete customer reimbursement, extending the liability to the receiving FIs would also be considered and put into effect in other countries as well in the future.


The UK fraud liability shift brings challenges and opportunities for FIs in the battle against fraud. It will be up to the FIs commitment and determination, from senior management level to the intern level, to stop frauds in the new landscape that would decide the outcome for the FIs.

This legislation signals a move to a more structured approach to APP fraud in the UK, but the impact is likely global. This change is something we also expect to see rolling out on a more global scale as well. We believe many fraud managers globally would benefit greatly by looking at the UK experience and learning from it.

To read more about NICE Actimize’s Fraud detection solutions visit this webpage.  

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