The contingent reimbursement model – resolving disputes under the code

As we have explored in previous articles, the Contingent Reimbursement Model (CRM) code sets standards expected of participant payment service providers (PSPs) and lays out a framework for reimbursing victims of Authorised Push Payment Fraud (APP) fraud.

One key benefit of the code, is that it offers participant PSPs an opportunity to share liability for these refunds based on culpability (measured against the standards) either between the two PSPs in the payment journey or across the code participant population.

In particular, participant PSPs are expected to agree how to share the cost of reimbursing a victim under an allocation mechanism. The code suggests best practice is:

  • A 50/50 split if both PSPs breached the standards expected - but it does not provide for a qualitative assessment of the impact of each breach.
  • If only one PSP has breached these standards, then the code requires that the “at fault” PSP should meet 100% of the cost of reimbursement.
  • If the customer has not met the requisite level of care the reimbursement will be limited to 50% (if one PSP has breached the standards) or 66% (if both PSPs have breached the standards).
  • If neither PSP has breached the standards but a reimbursement is still due, then the “no blame” fund comes into play.

Where a refund is due under the code but there is a non-participating PSP involved in the payment journey, the customer’s PSP (i.e. the sending PSP) is required to reimburse the customer come what may and then either persuade the non-participant PSP to comply with the code’s allocation mechanism or apply to the “no blame” fund to recoup the cost. It is assumed that applications to the “no blame” fund will be assessed to ensure PSPs are not marking their own homework.

Of course, given the introduction of this new regime (which will take time to bed in), the volumes of payments and the decision to reimburse being subject to a PSP’s individual assessment - it is very likely that PSPs will disagree from time to time.

Dispute resolution

The code requires that where PSPs cannot unanimously agree on allocation, they should pursue an Alternative Dispute Resolution (ADR) method.

The code sets out the following process for this:

  • The PSP wishing to use ADR will issue a “Notice of Intention to Refer”
  • Within 5 business days of receipt of this notice, the case handler of the sending PSP will commence an adjudication process (unless all parties agree arbitration would be a better option)
  • The sending PSP will then propose an independent dispute resolution provider and (within 5 business days of appointing the dispute resolution provider) issue a draft “Notice of Dispute” which will include a summary of the facts and issues requiring resolution
  • The parties should agree the content of the draft Notice of Dispute and follow the procedure set out by the appointed dispute resolution provider – including agreeing to be bound by the decision and sharing the costs of the provider.
  • Throughout, the PSPs will bear their own costs of the process.

Understandably, PSPs will want speedy and cost effective dispute resolution. However, given the additional burden of this process, it would not be surprising if very early into the life of the code, PSPs made a determined effort to reach swift commercial agreement on allocation of liability wherever possible.

Nonetheless, it can easily be seen how the volumes and issues involved may cause this process to grind to a halt, leaving the sending PSP bearing the costs of reimbursement. In such a scenario (or by a concerted choice) the PSPs may prefer to resolve their disputes on a portfolio basis - rather than case by case.

The code's wider impact on other disputes

Commitment to any code – especially with particular “standards” - is a stepping stone toward commitment to a binding legal duty upon which a customer (and not just those covered by the code) can refer to in any FOS complaint or legal proceedings.

For instance, this was seen in the case of Thomas v Triodos Bank NV [2017] EWHC 314 (QB), where the Business Banking Code was incorporated into the relationship, and in various mis-selling cases where claims often sought to assert that an industry standard, equivalent to say the COBS, should be implied into the bank/customer relationship.

Furthermore, where there is often not a bright red line between a specific customer type (e.g. retail vs commercial or micro-enterprise vs SME) and customers are fluid over the life of their banking relationship, one can easily see a risk of mission creep by those customers who have lost out and would like to gain the benefits of a generous voluntary code.

Final points for PSPs to consider

PSPs' case handlers (whether in legal or complaints departments) need to have a good grasp on the ADR process under the code so that they ensure the costs of reimbursement are properly allocated in an efficient and cost effective manner.

Legal, risk and compliance teams, including for PSPs not signed up to the code, also need to be aware that if the code develops into the industry standard it aims to be, at some point it will influence how victims' complaints or civil claims are dealt with.

Since the roll-out of the code, there have been calls for reimbursement in more and more circumstances. Even retrospective application of the code. This would be a dramatic increase in scope for what is a voluntary code and is not adopted industry-wide. It can be expected that these points and more will be raised in the first review of the code due to begin in July 2020 overseen by the LSB's Advisory Group.

To learn more about the contingent reimbursement model or for help addressing these points, get in touch via [email protected].