Written evidence submitted by Innovate Finance



Innovate Finance is the independent industry body that represents and advances the global FinTech community in the UK. Innovate Finance’s mission is to accelerate the UK's leading role in the financial services sector by directly supporting the next generation of technology-led innovators.


The UK FinTech sector encompasses businesses from seed-stage start-ups to global financial institutions, illustrating the change that is occurring across the financial services industry. Since its inception in the era following the Global Financial Crisis of 2008, FinTech has been synonymous with delivering transparency, innovation and inclusivity to financial services. As well as creating new businesses and new jobs, it has fundamentally changed the way in which consumers and businesses are able to access finance. 


There are around 1,600 FinTech firms in the UK. In 2018, job creation in FinTech grew by 61%, making it the fastest-growing sector in the UK economy. Six million UK adults downloaded a banking app for the first time during the coronavirus crisis - 12% of the adult population. Over 71% of digitally active UK adults now use the services of at least one FinTech firm.


Innovate Finance welcomes the opportunity to respond to the Treasury Committee’s Call for Evidence for its inquiry into economic crime. In responding to this Call for Evidence, the Innovate Finance team held several interviews with member firms of Innovate Finance. Those interviewed included High-growth FinTech banks (sometimes referred to as “challenger banks”) providing current accounts, savings and other banking services. Innovate Finance also spoke to RegTech companies within its membership, who provide AML and KYC solutions, and ancillary technology services, to financial institutions to help them combat economic crime and fraud.




FinTech providers take fraud in all its forms very seriously. Such providers have robust processes, enabled by technology to combat fraud, and are very aware of the need to look after all customer segments, especially the more vulnerable.


In 2020, there has been an increase in fraudulent activity, some of which can be linked to the Covid-19 pandemic. FinTech providers are detecting a general growth in scams, and more novel fraudulent activities committed via social or digital media have clearly become more commonplace.


FinTech providers support the spirit of the Contingent Reimbursement Model (CRM) code and believe that it has a sound basis. Mandating of the code could be supported by FinTechs, if the code was further developed, if its implementation was proportionate, and if it included requirements for technological investment.


FinTech providers are concerned about the Committee’s previous recommendation to enact a 24-hour delay on all initial or first-time payments. If real-time payments were to be stopped entirely, Faster Payment Services (FPS) would no longer work effectively as a method of payment for e-commerce companies. Furthermore, payment initiation services (PIS) will be unable to compete for users or businesses if faster payments are no longer essentially guaranteed instant settlement.


Stifling innovation in payment methods such as FPS and PIS will reduce convenience and choice for consumers and businesses, and damage our e-commerce sector - a vital engine of the UK’s economy. It also threatens the UK’s ability to compete with other markets leading in payments innovation such as Singapore, China and the EU. Rather than creating friction to payments services, FinTech providers believe that collective investment into technology to detect and prevent APP fraud provides a better, more sustainable solution in the longer term.


Innovate Finance response


  1. Emerging trends in consumer facing economic crime as a result of the COVID crisis


General trends


There has been a clear increase in fraudulent activity, some of which can be attributed to the economic and social consequences of the Covid-19 pandemic, such as restrictions on social gatherings, “lockdown” and the resulting economic downturn. It is well established that in turbulent and disruptive times, we see an increase in fraud attempts.


The pandemic has not, in itself, brought forward many new or novel activities by fraudsters. Phishing scams using email and phone have been targeted at vulnerable groups, such as the elderly, for some time. Threatened tax investigations or claims of tax irregularities from criminals claiming to be HMRC are common at the moment. Such attempts often play on consumers’ fears and lack of knowledge or vigilance.


Newer types of scams, targeting people on social media platforms, have become more commonplace in recent times. Smaller, higher frequency scams through apps such as SnapChat have grown, as have so-called “romance scams” via dating websites or other social media networks.


The growth could be attributed to the increasing numbers of people not in active employment (either furloughed or recently unemployed) becoming targets for money mules recruited online. There is growing concern about a rise in young people in particular being targeted. However, there is no hard evidence or data to support this yet.


There is also some evidence of drug dealers moving away from cash payments, using faked online stores to sell their goods, and an increasing criminal interest in being paid in crypto currencies.


Attributable specifically to the Covid-19 pandemic


The most notable trend in financial crime that has been detected and arises directly from the Covid-19 crisis is an increase in fraudulent receipt of government funds – specifically relating to schemes set up to help those affected by the crisis.


In particular, a growing trend has been seen in the receipt of funds from the Coronavirus Job Retention Scheme or Self-Employed Income Support Scheme to current accounts which have been newly opened or dormant for the previous few months. After receipt the funds are treated in the same way most laundered funds are – rapidly sent out to external accounts controlled by the recipient or their network. This trend is very similar to potential fraud seen previously with HMRC Self-Assessment tax return fraud, but has notably escalated during the crisis.


  1. The operation of the Contingent Reimbursement Model for Authorised Push Payment Fraud


Innovate Finance members support and uphold the spirit of the Contingent Reimbursement Model (CRM) code; one member we consulted is a signatory of the code.


The theory behind the CRM code - that there is a standard industry approach to how customer reimbursement works after a claimed fraud - is deemed very sensible. The code is still in its infancy and needs time to “bed in” and to be tweaked.


However it is acknowledged by Innovate Finance members that the code could work better. Three separate themes and questions for the future of the CRM code raised by Innovate Finance members are detailed below:


Mandating the CRM code


There is a live question of whether the CRM code needs to be mandated. Innovate Finance members are open to supporting mandating the code. However, they agree that if the code were to be mandated, it needs to encompass a proportionate approach and not put too much cost on smaller banks or EMIs.


Smaller financial institutions are concerned about the disproportionate costs that they would face upon signing up to the code if it were mandated. The code would benefit from clarification surrounding the limits of firms’ liability, to help smaller firms and EMIs manage those costs.


Some Innovate Finance members stated that they would be happy to see legislation introduced for mandating the code. In order to support such legislation, the code would need to be improved upon so that firms can: clearly understand what the Code requires and how they can meet the defined standards; be certain that required preventative measures do in fact help to stop scams; understand their individual liability calculate accordingly, and work to reduce their risks and costs associated with this by reducing the level of scams. Legislation to mandate the code would therefore need to make implementation viable for all players, and would need to come with the requirement for further investment in preventative technological solutions, to receive wider support within the FinTech industry.


Increasing friction of payments


The Committee’s report, “Economic Crime: Consumer View” published November 2019, included a recommendation to enforce a “mandatory 24-hour delay on all initial or first-time payments”. Innovate Finance members believe this recommendation presents a risk to the efficient functioning of e-commerce.


Currently, a minimum percentage of faster payments (FPS) are required to be real time. This service level agreement supports the use of FPS as an e-commerce payment method, and it would be concerning if this standard was abandoned. Payment initiation services (PIS) will be unable to compete for users or businesses, if faster payments are no longer essentially guaranteed instant settlement.


FPS service level agreements allow personal financial management transactions to be made with minimal friction. This has been instrumental in the growth of highly specialised, highly competitive FinTech providers offering products such as spending cards or foreign exchange. The introduction of additional friction will make it harder for consumers to use these solutions.


Overall, a sweeping, centralised change, such as that proposed by the Committee previously, is seen as disproportionate and could result in serious unintended consequences.


Technological investment


Innovate Finance members think there is significant potential to deploy new technology to address the root causes of economic crime, including APP fraud, and to improve the CRM code. It is acknowledged that this is a long-term solution and will require significant investment.


It is recognised that public-private sector forums can be effective models to help tackle fraudulent activity in financial services. Innovate Finance members have noted the work of the Joint Money Laundering Intelligence Taskforce (JMLIT) in this regard. It is recommended that the membership of this body be reviewed to ensure it represents the breadth of financial services, and the growing adoption of FinTech solutions by consumers and businesses.


Innovate Finance also supports the Economic Crime Innovation Working Group, jointly chaired by HM Treasury and UK Finance, with a remit to explore and address regulatory barriers to the adoption of new technologies to help fight financial crime. This group should continue to pursue these possibilities as a priority, to help improve access to innovative technology that can combat fraud.


More specifically, Innovate Finance members cited Confirmation of Payee as a good example of deploying technology to address APP fraud. Some discussed their rigorous process to find the most effective consumer messages to drive more careful behaviour on the part of consumers. There is support for cross-industry work to find the most effective consumer messages or “nudges”. However, it was acknowledged that Confirmation of Payee can still be overridden.


It was further acknowledged that overarching public education about fraud would be a helpful addition to government, private sector and civil society efforts to reduce the number of victims of fraud.


  1. The response of financial institutions to economic crime as it affects consumers


The Covid-19 pandemic has prompted some positive developments in how financial institutions are trying to protect their clients from economic and financial crimes. FinTech providers are continually updating their systems and processes to reduce the risk to customers of being defrauded. The increasing use of apps, biometric security, double and multi-factor authentication are all helping digitally-enabled customers increase their security.


However, fraudsters will target those who are vulnerable and/or do not have a thorough working knowledge of online safety. The elderly and infirm are at particular risk, especially through email and telephone based scams, and the young via social media.


Financial institutions are making individual and some sector-wide efforts to improve education on these subjects. However, as noted above, a wider societal approach with public sector support would likely have a greater impact on harder to reach segments of society. 


Future opportunities for combating fraud


Looking at fraud and economic crime in the round, it is clear that innovative, strong, and reliable solutions to protect against economic crime are needed. In the financial innovation sector, a number of RegTech companies are looking at ways of carrying out identity and KYC/AML checks in new and safe ways.


One potential solution is the greater adoption of digital identity, which is a means of remotely verifying whether customers are actually who they say they are. This is now vital for financial services companies who need to quickly and securely ensure they can onboard new customers. The efficiency, accuracy and safety of this system provided by RegTech companies is clear to see.


Digital identity should become the norm and be more thoroughly embedded in UK financial services. At the moment, the UK’s identity policy regulations maintain old-fashioned and riskier verification methods, such as physical address verification through credit reference agencies. Updating regulations to remove the reliance on these methods would be welcome, as would an increased focus on developing the role of digital identity within legislation and regulation.




Consumer-facing economic crime remains a pressing issue which FinTech providers are committed to tackling. FinTech providers take the obligations to their customers very seriously and continue to invest in ensuring that they have robust processes to prevent fraud and help those who have been defrauded.


Innovate Finance members think that the CRM code could be made mandatory if its implementation were to be proportionate and include provisions for technological investment.


Innovate Finance members do not believe that enacting mandatory delays to payments is a proportionate response to concerns about fraud. Creating this friction seriously risks creating the unintended consequences of stifling new and innovative payment methods which benefit consumers and businesses alike. A smarter and more sustainable response would be to invest in new technology to combat fraud - a responsibility that needs to be shared across industry.


A sharper focus on the role digital identity can play to help reduce instances of fraud and economic crime in the round would be welcome. Regulations need to be updated to ensure the UK is encouraging the safest and most efficient methods to verify that people truly are who they say they are.


In the spirit of “prevention is better than cure”, it is widely acknowledged that more needs to be done to prevent consumers falling for scams in the first place. Public education, collaboration with telecommunication and social media companies to prevent fraudulent advertisements, and further investment in preventative tech, will be required to bring down incidences of fraud.


December 2020