Banks could be forced to refund all victims of fraud in plans being proposed by the payments regulator, even retrospectively, if mandatory refund rules are introduced.
There has been a rise of more than 36pc in complaints to the Financial Ombudsman Service (FOS) this year compared to 2019 concerning how banks have dealt with victims of fraud and scams. Debbie Enever, for the financial watchdog, said ‘work still needs to be done’ on the voluntary code most banks signed up to last year.
A consultation is set to begin within weeks that will investigate whether people who are tricked into transferring money to scammers should be refunded automatically.
An industry source confirming the information said there has been a sizeable push from the Government to get this off the ground before the end of the year. Ministers are tired of banks ‘ducking their responsibilities’ and the prevailing view is that all victims should be refunded.
Compulsory refunds would end the lottery that victims of bank transfer fraud face currently, which means it is up to their bank to decide whether or not to reimburse them for their losses.
Code of conduct failing customers
In May 2109, many of the major banks signed up to a voluntary code of conduct that dictates how scam victims should be treated. The Contingent Reimbursement Model (CRM) code states that banks should refund victims if they are not at fault, once they have been tricked by criminals into transferring money out of their bank accounts.
However, the code allows lenders to deny a refund if they believe the customer’s own negligence led to the fraud, for instance if a victim ignored a warning that they may be facing a scam.
Richard Emery of 4Keys, a fraud investigation firm, said the wording in the code that explains the customer’s reponsibilities is too vague and has enabled banks to avoid refunding innocent victims. In many cases, they aren’t even told why their claim has been rejected.
Between April and September 2020, figures from the FOS revealed there were 6,603 complaints about banks from victims of fraud, up from 4,840 over the same period in 2019.
Banks often avoid refunding customers by claiming they should have been more careful before transferring money. But scammers are becoming increasingly adept at grooming victims into handing over cash or personal details, for instance by pretending they represent their utility company or are from the fraud department of the person’s bank.
Banks slow to refund fraud victims
According to figures from UK Finance, the banking trade body, lenders returned just 35pc of stolen funds to victims in the first six months of this year. Research from consumer group Which? found that one bank refused to refund customers fully in 99pc of cases. The group’s Gareth Shaw said the code is failing victims and should be reformed urgently.
Requiring banks to refund all scam victims would not only prevent this failure but would also incentivise them to prevent fraud occurring in the first place.
Banks have been aware since 2013 of the risk of fraud when people transfer money using only the sort code and account number without checking the name on the account the money is being sent to. According to Mr Emery, the banks have failed to act, are guilty of gross negligence and must refund historic victims.
Since June, major banks have implemented ‘confirmation of payee’, which checks that the sort code and account number match the name on the recipient’s account. Yet fraudsters have increased activity during the pandemic. More than 66,000 people fell victim to bank transfer scams, collectively losing £207.8m in the first half of 2020 alone.
The Payment Systems Regulator, which will lead the consultation, said it would keep a close eye on banks’ behaviour to ensure fairness for both consumers and businesses.
Katy Worobec, of UK Finance, admitted the voluntary code was not working as intended, resulting in a lack of consistency in outcomes for customers. She added that her organisation would continue to work closely with the Government to find a solution.