Philipp v Barclays Bank - Supreme Court judgment finds payment service providers are not liable to reimburse victims of 'APP' fraud

Posted: 12/07/2023

On Wednesday, 12 July 2023, the Supreme Court handed down its decision in Fiona Philipp v Barclays Bank UK Plc.

In what is a blow to consumers and a relief for banks, the Supreme Court has disagreed with the Court of Appeal’s decision and ruled in favour of Barclays, meaning victims of authorised push payment (APP) fraud cannot call on a long-established duty of care known as the ‘Quincecare’ duty to seek reimbursement of funds from their bank or other payment service provider (PSP).

Banks and PSPs will avoid the wave of APP fraud related litigation they had feared, but various developments outside of the courts could still provide some redress to victims of this type of fraud in the future.

Background to the claim

This claim related to the application of the ‘Quincecare’ duty – a duty for banks ‘not to execute a payment instruction given by an agent of its customer without making inquiries if the bank has reasonable grounds for believing that the agent is attempting to defraud the customer’ – to APP fraud. In this type of fraud, the fraudster poses as the customer’s bank and: a) tells them their bank account has been compromised; and b) convinces them to transfer monies to supposed ‘safe accounts’. The funds are then misappropriated by the fraudster.

Mrs Philipp brought a claim against Barclays to recover the £700,000 she had lost by a particularly sophisticated case of APP fraud. At first instance, the High Court had granted summary judgment in favour of the bank on the basis that the Quincecare duty does not apply to APP fraud. The Court of Appeal overturned this decision, recasting the Quincecare duty by holding that it was not limited to the agent/principal situation and could apply where a customer had themselves authorised a payment induced by fraud.

The decision

The judgment’s headline findings and implications can be summarised as follows:

• Banks are not under a legal duty to step in when they think their customer is the victim of APP fraud.
• It is for Parliament and the regulators to determine whether or to what extent banks should be required to reimburse APP fraud victims.
• Recent legislation will protect some consumers going forwards (mandatory reimbursement for consumer victims of APP fraud using the Faster Payments system and similar protections for users of CHAPS expected) but not in cases involving international transfers.
• Banks owe a duty to protect their customers against the acts of customers’ dishonest agents.
• There is an implied condition that a bank will act honestly towards its customer.
• Banks will likely be held liable if they go ahead with transfers without making further inquiries where they have received reliable information from a source, such as the police suggesting that the customer’s payment instruction has been procured by fraud.
• Banks should take reasonable steps to try to recall payments once the customer instructs them to do so.

In explaining the decision to overturn the previous judgment, Lord Leggatt found that a bank has a strict duty to act on a customer’s instructions and to do so promptly, and that it was not its duty to ‘concern itself with the wisdom or risks of its customers’ payments decisions’ unless there was an express contractual term requiring it to do so. The court cannot, he held, impose a contractual term that was not agreed by the parties. He further commented that a bank cannot unlawfully refuse to act on a customer’s mandate, inferring that in cases such as that of Mrs Philipp’s instructions to Barclays, the latter could have exposed itself to a claim against it had it not transferred the monies to the fraudster’s bank account. Further, the court rejected Mrs Philipp’s argument that her order to transfer money was an attempt to misappropriate funds.

Commentary: recasting of the Quincecare duty or the same old?

It appears that the floodgates of litigation against the banks in respect of APP fraud have been kept closed…for now.

PSPs will, however, be aware of the current sea change that already appears to be in motion.

Notably, Lord Leggatt agreed with the Court of Appeal that it is possible that a relevant duty of care could, in principle, arise where a bank acts upon a victim of APP fraud’s instructions; he merely concluded that such a duty had not arisen in this case. He further clarified that the Quincecare duty did not only apply to corporate customers (since it applies in any situation where one person is given authority by another person to give payment instructions to a bank). Further, a significant factor in the Supreme Court’s ruling appeared to be its fear of stepping on the toes of Parliament and into the realms of creating legislation. Such change, he argued, needed to be driven by ‘regulators, government and ultimately Parliament’.

The Supreme Court referred to the progress that is being made, outside of the courts, to protect victims of APP fraud – eg the Payment Services Regulations 2017, and the role of the Consumers’ Association in applying pressure to the Payment Services Regulator (PSR) to drive this change. Further, it commented that the Financial Services and Markets Bill 2023, which received royal assent on 29 June 2023, will provide some, albeit limited, redress for victims of APP fraud. The PSR will now be under an obligation to implement mandatory reimbursement in relation to orders executed subsequent to fraud or dishonesty via the Faster Payments Scheme (this redress will not, however, be available to large businesses). Further, receiving banks will be responsible for funding 50% of the reimbursement. This will provide an additional burden on the banks, but some level of comfort to consumers using the Faster Payments Scheme.

A significant hurdle that remains for customers obtaining redress, however, is that they will have no recourse for compensation if they have made international payments.

Conclusion

Commenting on the decision, Michael Brown, a litigation partner at Penningtons Manches Cooper, who acted on behalf of the Consumers Association, an intervening party in the case, said:   

“PSPs have avoided the flood of litigation they feared. If greater protection is to be provided to prospective victims of APP fraud, the courts will not be a driving force for this reform. All PSP and consumer eyes will, therefore, be on the regulators and Parliament. The good news for consumers is that these changes seem to be in motion; the good news for the banks is that this appears to be slow-motion.”

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