Banking Sector: Fraudulent Accounts

Maria Miller Excerpts

Tuesday 5th December 2017 Westminster Hall

[Mrs Maria Miller (Basingstoke) (Con)]

I beg to move,

That this House has considered fraudulent accounts and the banking sector.

It is an absolute pleasure to serve under your chairmanship, Mr Hollobone, for the first time that I can recall. I hope we have a full and useful debate.

More than two years ago, a constituent approached me about having been the victim of banking fraud. I called this debate because I have been unable to get the spider’s web of organisations with responsibility for making our banking system safe to act in the best interests of my constituent and bring to justice the perpetrators of a fraud that has left him £13,500 poorer.

The British banking system is one of the most advanced in the world, with an apparent cornucopia of legislation to give customers a comfort blanket of trust. My constituent fell victim to a simple fraud, paying £13,500 into the British high street bank account of an individual who had undertaken to deliver services that my constituent never received.

My constituent, under the impression that this country’s extensive money laundering regulations meant that bank accounts could be opened only by legitimate individuals with established UK addresses, reported the crime to the police when it became clear that the services that he paid for would not be provided, and that he had been the subject of a fraud. He was told by the police that available information about the person who opened the bank account was insufficient for them to proceed with their inquiries, and that the bank account involved had been opened with a provisional driving licence. Following cursory police investigations, it became immediately clear that the individual concerned had never lived at the address supplied to the bank when the account was opened. Indeed, the address given was incomplete.

To this day, Lloyds bank insists that it made no errors in allowing the opening of the bank account used to defraud my constituent, even though the police have confirmed that the suspect has never resided at the address given to Lloyds. Furthermore, for more than a year afterward, the Met police did not pursue inquiries into the crime because they thought, erroneously, that Lloyds would not give them the account opening information that they needed to pursue more thoroughly the criminal involved. In fact, that information had already been given to another police force in Bedfordshire. By the time the error was established, the case was a year old and lines of inquiry were cold.

I have spent two years being handed from one organisation to another in the attempt to have this case properly investigated. I hope that my hon. Friend the Minister can explain how Lloyds can be held to account for the situation. Is he content that a bank account can be opened without a valid postal address for the applicant? Is that not in breach of money laundering regulations? I am not a lawyer, but I have read the regulations, and it would seem so.

The police thought that Lloyds would not divulge the application details, yet they found a year on that that was not the case. Why is there no established protocol for banks and police to follow in fraud cases such as this? Which organisation is responsible for ensuring that Lloyds complied with money laundering regulations when, as a result of the bank’s actions, there is insufficient information for the police to investigate possible criminal money laundering breaches? Is it perhaps time to review banks’ responsibilities when it comes to fraud, and bring them more in line with the credit card industry?

[Mr Alister Jack (Dumfries and Galloway) (Con)]

I commend my right hon. Friend on securing this debate. She mentions the credit card industry. She will be aware that the protections afforded to people using credit cards are far greater than those afforded to people using debit cards or making online transfers. Does she agree that those protections should be extended to forms of banking other than just credit cards?

[Mrs Miller]

My hon. Friend is absolutely right to bring up that inconsistency in how financial consumer protection works. Many people would be taken aback to understand how little protection they might have on a bank account money transfer when, if they simply used credit cards, they would be far more protected. The difference seems reflective of the situation in the past when credit cards were set up, when they might have been seen as a much riskier proposition. The evidence that I am giving suggests that banks are also a bit of a risky proposition when it comes to fraud. He makes an excellent point.

The cost of fraud across payment cards, remote banking and cheques to banking customers and share- holders was more than £768 million last year, involving almost 2 million separate cases. Given the scale of the problem, it is little wonder that the police are not always in a position to act.

For the past two years, I have done all that I can to get justice for my constituent, only to be passed around a bewildering array of organisations. Lloyds bank says that it made no error, yet the police say that the individual who opened the account never lived at the account opening address. The ombudsman says that it cannot investigate how an account was opened, the Financial Conduct Authority tells me that it does not investigate individual cases and Action Fraud and the National Fraud Intelligence Bureau do not investigate crime, it appears, but pass it to the relevant police force. Who exactly ensures that money laundering regulations are followed, and that banks allow new accounts to be opened only with proper evidence of identity and residence?

In this case, the police are clear: their investigation shows that the person who opened the account never resided at the address. I feel trapped in a Catch-22 situation. Lloyds allowed inaccurate information to be used to open an account, but because the identity evidence that Lloyds collected is so poor, the police have no grounds to do anything further, and it appears that only the police can take action to enforce money laundering regulations. The Payment Systems Regulator has admitted that bank fraud is causing customers harm and the industry is not doing enough, and that banks could be doing far more to identify fraudulent payments, but has rejected calls to put more pressure on banks to prevent fraud by making them responsible for reimbursing victims, as is the case with credit card fraud. At a time when the payments industry can spot credit card fraud using algorithms, surely we can expect banks to properly check the ID of their customers.

Financial Fraud Action UK, an industry body, is calling for the payments industry to be more transparent about the scale of the problem and to take a common approach to how frauds are handled. Which?, the consumer magazine, is also clear that banks should shoulder more responsibility for money lost due to fraud, but they need to be incentivised to do so and to focus more on detecting and preventing fraud.

Failure to check account opening details correctly is a serious criminal offence, with a criminal penalty to match. The banking code is clear that documents must prove ID and address. The police say that the reason their investigation is not ongoing is that the person involved never lived at that address, yet no one appears to be willing to hold Lloyds to account, perhaps because the evidence available does not meet the criminal standard of proof.

Will the Minister explain why my constituent should be satisfied? Surely Lloyds has breached its own anti-fraud requirements. Lloyds closed the account because of fraud. In correspondence with me, the bank has admitted that a provisional driving licence was used, but will not confirm what other information was used and why it failed to check the address, given that it was incomplete. Lloyds allowed a fraudulent account to be opened and there appears to be a reasonable case for saying that that is a breach of money laundering regulations. Will the Minister investigate, or at least tell me who might investigate? I have tried for two years, but I simply cannot find out who that might be.

Some cases similar to my constituent’s have received compensatory payments from other high street banks because of the investigative journalism of somebody at The Daily Telegraph. I find it a miserable state of affairs when we rely on journalists’ intrepid work to ensure that our banking system is fair and accountable.

In February 2016, the Home Secretary, now the Prime Minister, established a fraud taskforce. Can the Minister update the House on what has been done through that taskforce to stop banks allowing accounts to be opened fraudulently? My constituent, who quite rightly wants to protect his privacy, needs to have justice, but he also wants his experience to lead to changes that will help to stop this situation happening to many other people.

[The Economic Secretary to the Treasury (Stephen Barclay)]

It is a pleasure, as always, to serve under your chairmanship, Mr Hollobone. I pay tribute to the tenacity with which my right hon. Friend the Member for Basingstoke (Mrs Miller) has championed the cause of her constituent, who has clearly suffered from the traumatic case that she rightly raises with the House today. She outlined that she has been working on this case for some time, including exchanging correspondence with Treasury Ministers last year. I welcome the opportunity to update her on the work of the taskforce that was set up, as she correctly said, by the Prime Minister and on developments with the payment systems regulator and others.

To be clear, banks must take action to prevent accounts being used for criminal purposes. The Financial Conduct Authority is responsible for ensuring that firms meet their legal and regulatory obligations. As my right hon. Friend is aware, the FCA is an independent body. That is vital to its role; its credibility, authority and value would be undermined if it were possible for the Government to simply intervene in its decision making.

I will discuss the positive steps that the regulators and industry are taking shortly, but I will first touch on the issue at the core of my right hon. Friend’s concerns. Bank accounts used for fraud and other criminal purposes are a serious concern of the Government, the FCA and the industry, particularly given that authorised push payment scams—the type of fraud to which she refers—are the second biggest payment fraud after card fraud. The FCA’s rules expressly require banks to have systems and controls to counter the risk that they are misused for the purpose of financial crime, including money laundering and fraud.

The money laundering regulations require banks to verify the identity of their customer and to assess the purpose and intended nature of the business relationship when a customer opens a bank account. A key part of the regulations is a requirement to carry out customer due diligence, which was another of my right hon. Friend’s core concerns. Customer due diligence measures mean verifying the customer’s identity on the basis of information or documents obtained from a reliable source that is independent of the customer. As I understand it, Lloyds maintains that when it opened the account, it was applying the “industry-wide acceptable documentation”, but I know that my right hon. Friend has concerns in that regard.

Since my appointment, I have encouraged the industry to consider the use of new technologies where they are as effective or more effective than existing practices. The increasing digitisation of financial services and products means that it is important that customers can prove who they are online. Firms should develop robust tools to ensure that they know who they are dealing with. In essence, there is scope through an electronic footprint to enhance the standard of customer due diligence in the future.

Where a bank assesses greater risk, it may take additional measures, including seeking additional documentation and checking the customer’s source of wealth or funds. Banks must conduct ongoing monitoring, including scrutiny of the transactions undertaken throughout the course of the relationship, to ensure consistency with the customer’s business and risk profile. Banks must also undertake reviews of customer records so that information obtained for the purpose of due diligence is kept up to date.

The FCA is responsible for supervising banks’ compliance with the money laundering regulations and for ensuring that they maintain systems and controls to prevent financial crime more generally. If the FCA finds evidence that a regulated firm has not undertaken due diligence checks, that firm would be in breach of the money laundering regulations. That addresses one of my right hon. Friend’s core questions about who is liable and who enforces the money laundering regulations: it is the FCA’s responsibility to ensure that firms have systems and controls in place to avoid money laundering.

[Mrs Miller]

The point that I made was that when I wrote to the FCA, it said that it did not take on individual cases. The Minister is right to say that it looks at systems and processes, but not at individual cases. I hope he might be able to refer me to who does look at individual cases, because, frankly, I have not worked that out in two years—but he is much cleverer than I am.

[Stephen Barclay]

I will come to some of the steps that are being taken to mitigate that. The key point is whether the standards applied met the requirements of the money laundering regulations or whether there was a loophole. I know that my right hon. Friend has corresponded with the FCA on that point.

As I say, if the FCA finds evidence that a firm has not undertaken its due diligence checks, that firm would be in breach of the money laundering regulations. Where a bank falls short of its obligations, the FCA has shown that it is capable of taking action through multi-million pound fines for two of the largest banks in recent years. At the same time, the FCA must ensure that its supervisory regime is proportionate and efficient and that its unintended consequences are minimised.

I am sure my right hon. Friend will appreciate and recognise that there is a balance to be struck in terms of the level of scrutiny required for due diligence checks. Recently, the hon. Member for Bristol West (Thangam Debbonaire) raised the issue that, at the other end of the spectrum, refugees often experience concerns about their ability to open a bank account because banks ask for levels of documentation that give them the impression that they are being prevented from opening accounts. So the balance is between a proportionate level of due diligence checks and a level that does not stop refugees, for example, being able to legally open a bank account.

My right hon. Friend the Member for Basingstoke also raised the issue of the Payment Systems Regulator, which is leading the work on this type of scam where someone is tricked into making a payment to the wrong account or into paying the fraudster directly. The Government have made it clear that more should be done to stop that happening and to mitigate the harm caused when it does happen. I am pleased to say that progress is being made. The PSR’s ongoing programme of work with industry aims to reduce the risk of the scams occurring and to reduce the damage that they cause. Existing initiatives include better data sharing between banks, a function to enable customers to be sure who they are transferring money to and best practice standards for the reporting of scams. The PSR has outlined milestones for those initiatives to ensure that the momentum is kept up.

Although the PSR accepts that not all scams can be prevented, it has taken a decisive step to align incentives and to reduce harm. It has proposed a contingent reimbursement scheme in which banks would reimburse victims when the banks have not met the required best practice standards, provided that the victims had taken appropriate care when making the payment. That speaks to a further point that my right hon. Friend made about compensation. The PSR’s consultation on that scheme is open until 12 January 2018. The consultation gives a clear sign to consumers that the regulator is on their side, and the PSR will respond to it in due course.

Banks and the FCA must do all they can to prevent fraudulent bank accounts from being opened in the first place, but fraud is a much wider problem. The joint fraud taskforce, as my right hon. Friend mentioned, was set up by the Prime Minister when she was Home Secretary in 2016 as a partnership between Government, law enforcement and the financial sector. The taskforce is working in innovative ways to deliver a more effective response to fraud, including by investing £3.1 million, with industry, in a campaign to improve the ability of people and businesses to protect themselves from fraud; working to understand how even more funds can be returned to fraud victims; pursuing a cross-industry strategic plan on so-called “card not present” fraud; and considering what makes victims susceptible to fraud and how to reduce vulnerability.

The Home Office has asked Her Majesty’s inspectorate of constabulary and fire and rescue services to conduct a review of police response to fraud at a local level, which my right hon. Friend also raised as a concern. The review will assess how local forces deal with demand, assess risk and provide victim care services and will examine the role of the City of London police as the national lead force for fraud.

I thank my right hon. Friend again for raising these issues. The Government recognise the terrible impact of this type of fraud on its victims. There are already strict rules that banks must comply with when opening new accounts, and the independent FCA is responsible for ensuring they do so. The PSR and the industry are doing robust work to tackle all types of fraud, working with the Government’s joint fraud taskforce. The Government will continue to drive appropriate action on these issues, which are so important to all of us in this House.

[Mrs Miller]

I sense that the Minister is drawing to a close. His remarks have addressed the generalities of the banking system, which I understand are hugely important to the regulator and the Government, but may I press him again on particular instances in which individual constituents such as mine have been let down? It is very difficult to see what recourse they have when banks fail to abide by their own codes of practices and rules, leaving them poorer for it.

[Stephen Barclay]

As I understand it, my right hon. Friend draws a distinction between systemic responsibility for the rules of a firm as a whole and responsibility for individual cases, but if I have mischaracterised that distinction, I am happy to write to her. My understanding is that responsibility for firm-wide systems and controls falls to the FCA, but specific one-off cases of fraud are in the police’s remit, so it is for the police to look at individual cases. I am very happy to follow up that point in further discussions.

[Mrs Miller]

May I detain the Minister a moment longer? The problem is that if a bank fails to gather information about a perpetrator of a crime who has opened a bank account, it leaves police unable to follow the perpetrator. Ultimately, it is very difficult for the police to find the criminals if information on their addresses and names has not been collected in the first place.

[Stephen Barclay]

I am acutely aware of the problem that my right hon. Friend raises. Whether the correct information was collected in her constituent’s case is an issue of fact: I understand from Lloyds that it was, but my right hon. Friend may care to differ. Her point about the remit of the police illustrates the reason the Prime Minister asked Her Majesty’s inspectorate of constabulary when she was Home Secretary to review the role of the police in addressing these issues.

All hon. Members recognise how traumatic these cases are. Prevention is better than cure, which is why the industry is taking measures through the PSR. Where fraud occurs, we need to look at how the responsibility of the banks aligns with potential compensation. The PSR consultation is open until mid-January, and I am sure my right hon. Friend will want to contribute to it. We need to look at the balance of responsibilities between the FCA as regulator and banks in individual cases.

I hope my right hon. Friend will be reassured to hear that, partly as a consequence of her tenacity in raising her constituent’s case, the Prime Minister has announced a review of police response and a suite of measures on the FCA, on standards and on the role of the PSR, to ensure that others do not suffer as my right hon. Friend’s constituent has.

Question put and agreed to.