Confirmation of payee: a valuable international tool in the fight against fraud?

Recognised as a particularly valuable tool in combatting fraud, confirmation of payee  (CoP) is designed to stop certain types of authorised push payment (APP) fraud and accidentally misdirected payments by simply checking whether the name of the payee's account matches the name and account details provided by a payer.

The UK approach

CoP was first introduced in the UK by the Payment Systems Regulator (PSR), which directed the UK's six biggest banking groups to implement a CoP system. The PSR's analysis of the initial roll of CoP showed positive results, with CoP slowing the increase in APP scams, reducing the level of fraudulent funds received by payment service providers (PSPs) that have implemented CoP, and reducing the number of accidentally misdirected payments.
 
Encouraged by this success, the PSR has pushed for a wider adoption of CoP by other PSPs, including banks, building societies and e-money institutions and recently issued "Specific Direction 17 on expanding Confirmation of Payee" (SD17).

Two-tier groups 

The aim of SD17 is to further the PSR's objective of seeing more PSPs adopt CoP and it directs two groups of PSPs to put in place and use a system to provide CoP by set dates. 

Group one includes the specific named PSP entities listed in Schedule 1 of SD17 that must put in place and use a system to provide CoP by 31 October 2023. 

Group two casts a wider net and captures a broader range of PSPs (as defined in SD17) that meet certain conditions, such as being a participant in Faster Payments or CHAPs. Group 2 PSPs have longer to get ready than Group one and must put in place and use a system to provide CoP by 31 October 2024. 

The requirement to provide CoP functionality currently only applies where the payer and payee payment accounts are in the UK. The hope is that extension of the CoP system will continue to reduce payment fraud and misdirected payments in the UK.

International focus?

While increased adoption of CoP by PSPs in the UK will help combat payment fraud domestically, the lack of an international approach remains a worrying gap in protection that fraudsters are likely to seek to exploit. 

Alongside the UK, the Netherlands has taken a market leading approach with nearly 99.5% of payments being subject to a CoP-style check, which validates the international bank account number (IBAN), and is known as the "IBAN name check". However, like the UK, the Dutch approach to CoP has been to focus on domestic rather than international transactions. Across the rest of Europe the approach is less cohesive and there is currently no mechanism for a Europe-wide  CoP system.

The European Commission (when asked by way of an EU parliamentary question whether it envisages an EU-wide introduction of a CoP system), has said by way of response that the introduction of any such system would take "sufficient time for payment service providers across the EU, including those with little experience in this area and less developed technological capacities, to make the necessary adaptations to offer the service". In other words, a Europe-wide CoP approach is still a way off, with the Commission not currently considering initiating legislative action in this area. While it remains possible for PSPs to voluntarily implement CoP, without a mandate to do so take-up make be limited, reducing its effectiveness.

Osborne Clarke comment

It seems that for now the UK and the Netherlands remain outliers, leading the way in the implementation of a domestic system of CoP. However, without wider adoption and the ability for systems to check account details across the EU and the UK, CoP will not be able to realise its full fraud prevention potential. It remains to be seen if a more harmonised approach to CoP will be taken internationally.

Ciara Davies, an Associate with Financial Institutions Group at Osborne Clarke, co-authored this Insight.