Economic Crime: Consumer View

Economic Crime: Consumer View

Third Report of Session 2019 Report

(together with formal minutes relating to the report)

Ordered by the House of Commons

to be printed 22 October 2019.

This report is the second the government has published on economic crime in the UK and is an interesting read. The first inquiry was the Economic Crime, Anti-money laundering supervision and the advisory sanctions implementation and focused on money laundering, terrorist financing and sanctions in the UK as well as the regulatory and legislative landscape. This new inquiry focused on the scale of economic crime faced by British consumers, ways that financial firms are combating economic crime, how economic crime is investigated, and consumer’s rights and responsibilities.

In the first half of 2019 over £600 million was stolen from consumers by fraudsters. It is now a very serious problem, with scams getting ever more sophisticated, from so-called “romance fraud” to posing as a consumer’s internet provider. Authorised push payment (APP) in which a consumer is conned into processing a payment to an account controlled by a criminal. This is now a new and growing problem the government says.

In the first half of 2019, the industry prevented £820 million of unauthorised fraud. One key area of prevention, due to begin implementation soon, is ‘Confirmation of Payee’. To date fraudsters have relied on the account name not being matched to convince consumers to transfer money. This has continued despite banks knowing this was a weakness in the system. The new system will match actual account names with those provided by consumers and flag any differences. While it will not solve economic crime alone, it is part of the solution. Further delays to implementation should not be allowed, and the regulators should look to use statutory powers if financial firms are not ready by the March 2020 deadline.

Fraudsters often use high pressure tactics to convince consumers to transfer money, which does not allow consumers; time to consider if they are being defrauded. The review recommends that all initial payments between accounts are subject to a 24-hour delay.

There have been positive technological developments which allow financial firms to track fraudulent transactions across the banking system. However, legislation lags behind, making recovery of these funds difficult. The Government should review recovery of stolen funds by way of legislation and should ensure it is ‘fit for purpose’. The FCA should set tight deadlines for financial firms to block accounts receiving stolen funds once suspicious activity has been identified.

The ‘Contingent Reimbursement Model’, came into effect in May 2019, provides financial firms with a clear framework under which they should reimburse. We understand that these Codes are voluntary basis and members allowed it to be introduced quickly. However, it should now be made compulsory.

Whether or not a consumer is reimbursed also comes down to whether they are deemed to be ‘grossly negligent’. The lack of definition of this term has led to inconsistencies across the sector and we recommend the regulators define this promptly. The regulators should require financial firms to provide consumers with clear guidance on what they expect of their customers in light of that definition.

Conduct of the inquiry

The government heard that there had been a lack of resourcing allocated to investigating economic crime. A national fraud strategy is only just being implemented, which will include a commitment to improve the police response to fraud. This has taken far too long and we expect a Government update within six-months of publication of this report.

The Government should require all frauds to be reported by the financial sector. It must also ensure consumers reporting fraud are told clearly how their reports will be used. The reported attitudes of staff at Action Fraud towards victims are unacceptable and the Government must set out what it has done to address this issue.

On 29 March 2018, we launched an inquiry into Economic Crime. We announced that the inquiry would be organised into two strands:

  1. • Anti-money laundering and the sanctions regime. The Committee would examine the scale of money laundering, terrorist financing and sanctions in the UK, the current regulatory and legislative landscape, and how individuals, firms, and the wider economy have been impacted by these regimes and the implementation of them.
  2. • Consumers and economic crime. The Committee would scrutinise the scale and nature of economic crime faced by consumers, particularly retail bank consumers, the effectiveness of financial institutions in combatting economic crime, and the security of consumers’ data.

The government published a report covering the anti-money laundering and the sanctions regime in March 2019. The Government responded in May 2019.

This Report covers consumers and economic crime. While they again examine the law, this time they focus on how legislation affects consumers, both directly and indirectly, who have experienced financial crime during their interactions with financial services firms. They will define financial services firms as banks, building societies and payment system providers.

As well as receiving wide ranging written evidence, the government held the following oral evidence sessions:

  • 27 November 2018—Richard Piggin, Head of External Affairs, Which? Richard Emery, Independent Fraud Investigator, 4Keys International.
  •  8 January 2019—Police Commander Karen Baxter, Police National Coordinator for Economic Crime, City of London Police; Detective Chief Superintendent Peter O’Doherty, Head of Crime and Cyber, City of London Police.
  • 13 February 2019—Stephen Jones, Chief Executive, UK Finance; Susan Allen, Head of Retail Business Banking, Santander UK; Chris Rhodes, Chief Product and Propositions Officer, Nationwide Building Society.
  • 2 April 2019—Panel 1: Mark Tingey, Head of Financial Crime Operations, Metro Bank; Panel 2: Ruth Evans, Independent Chair, Authorised Push Payments Scams Steering Group; Richard Lloyd, Advisor, Authorised Push Payments Scams Steering Group
  • 15 May 2019—Megan Butler, Executive Director, Investment, Wholesale and Specialists Division, FCA; Chris Hemsley, Co-Managing Director, Payment Systems Regulator; Mark Steward, Executive Director of Enforcement and Market Oversight, FCA. We would like to thank all those who provided written and oral evidence during this phase of the inquiry.

The type and scale of economic crime affecting consumers

Fraud “is now the second most common crime type in England and Wales, with nearly every individual, organisation and type of business vulnerable to fraudsters.”

Greater Manchester Police Force defines fraud as “the volume crime of the 21st Century” and the Financial Ombudsman Service recently told us it had seen “significant growth” in economic crime cases.

The Report covers consumers and economic crime.

The Committee would scrutinise the scale and nature of economic crime faced by consumers, particularly retail bank consumers, the effectiveness of financial institutions in combatting economic crime, and the security of consumers’ data.

The published Report covers the anti-money laundering and the sanctions regime in March 2019. And the government responded in May 2019

While they again examine the law, this time they have focus on how legislation affects consumers, both directly and indirectly, who have experienced financial crime during their interactions with financial services firms. They define financial services firms as banks, building societies and payment system providers. As well as receiving wide ranging written evidence, we held the following oral evidence sessions: -

  • 27 November 2018—Richard Piggin, Head of External Affairs, Which? Richard Emery, Independent Fraud Investigator, 4Keys International.
  • 8 January 2019—Police Commander Karen Baxter, Police National Coordinator for Economic Crime, City of London Police; Detective Chief Superintendent Peter O’Doherty, Head of Crime and Cyber, City of London Police.
  • 13 February 2019—Stephen Jones, Chief Executive, UK Finance; Susan Allen, Head of Retail Business Banking, Santander UK; Chris Rhodes, Chief Product and Propositions Officer, Nationwide Building Society.
  • 2 April 2019—Panel 1: Mark Tingey, Head of Financial Crime Operations, Metro Bank; Panel 2: Ruth Evans, Independent Chair, Authorised Push Payments Scams Steering Group; Richard Lloyd, Advisor, Authorised Push Payments Scams Steering Group
  • 15 May 2019—Megan Butler, Executive Director, Investment, Wholesale and Specialists Division, FCA; Chris Hemsley, Co-Managing Director, Payment Systems Regulator; Mark Steward, Executive Director of Enforcement and Market Oversight, FCA. We would like to thank all those who provided written and oral evidence during this phase of the inquiry

The type and scale of economic crime affecting consumers

Fraud “is now the second most common crime type in England and Wales, with nearly every individual, organisation and type of business vulnerable to fraudsters.”Greater Manchester Police Force defines fraud as “the volume crime of the 21st Century” and the Financial Ombudsman Service recently told us it had seen “significant growth” in economic crime cases.

Types of economic crime affecting consumers.

There are two main types of economic crime affecting consumers: authorised and unauthorised payment fraud. UK Finance, a representative body for the banking and finance industry, defines these as follows:

Authorised fraud:

In an authorised push payment (APP) fraudulent transaction, the genuine customer themselves processes a payment to another account which is controlled by a criminal.

Unauthorised fraud:

In an unauthorised fraudulent transaction, the account holder does not provide authorisation for the payment to proceed and the transaction is carried out by a third party.

They heard evidence about specific scams which illustrate these two different categories of fraud.

Authorised fraud (or APP Fraud) could include: -

  • asking for temporary use of a bank account to transfer funds;
  • romance fraud where dating sites are used to develop a sham relationship where cash is eventually requested; and
  • holiday letting scams where consumers pay fraudsters for what turns out to be a fake listing.

These examples all require the consumer to authorise the payment themselves, the fraudster does not take over the consumer’s bank account.

With unauthorised fraud, the fraudster does take control of the consumer’s bank account and as such the consumer is very often unaware the payment has been made. An example given to us was when a consumer receives a phone call from a fraudster posing as their internet provider. The scammer convinces the consumer to give them remote access to their computer, allowing the scammer to access their bank accounts.

Scale of economic crime affecting consumers.

UK Finance collates figures on the levels of authorised and unauthorised fraud each year. In the first half of 2019, £408 million was stolen by fraudsters via unauthorised fraud and £208 million via authorised fraud.

The total figures reported for 2018 were £844 million stolen via unauthorised fraud, and £354 million via authorised fraud, while in 2017 £731 million was stolen in unauthorised fraud and £236 million in authorised fraud.

There are also significant volumes of unauthorised fraud prevented by financial services firms. UK Finance report that banks and card companies managed to prevent £1.66 billion of unauthorised fraud in 2018, the equivalent of £2 in every £3 of attempted fraud. In the first half of 2019 the industry prevented £820 million of unauthorised fraud. It is difficult to get an accurate understanding of the scale of consumer economic crime. UK Finance has cautioned that the authorised fraud figures are not directly comparable year on year as there are now more banks reporting and greater clarity around what an APP scam is.

Megan Butler, Executive Director, Investment, Wholesale and Specialists Division at the Financial Conduct Authority (FCA), told us that:

  • There are a lot of different statistics out there that try to size this problem in different ways, but the consistent message that comes through, although the numbers do not necessarily reconcile terribly well, is that this is a significant problem, and it is growing.

The Government’s Economic Crime Plan, published in July 2019, states that “Economic crimes can involve complex methodologies that are continuously changing as criminals and terrorists identify and exploit new vulnerabilities in society.”

Megan Butler of the FCA told us that growth in economic crime was often linked to technological developments, which allowed scams to progress quickly.

The speed at which economic crime can develop can be demonstrated by the FCA’s ‘Financial crime: analysis of firms’ data’ report. Published in November 2018, it did not mention APP Fraud. This is because when the FCA designed the survey they relied on outdated categories of economic crime, established before APP Fraud became the significant scam it is now.

It is clear, both in terms of financial losses and in the variety of scams suffered by consumers, that economic crime is a serious and growing problem in the UK. Trends need to be identified quickly. In order to ensure a clear picture of the scale and types of economic crime facing consumers, the FCA should publish data on economic crime within six months. It should evolve its data collection practices ensuring they allow for emerging trends, while still enabling year-on-year comparisons.

https://publications.parliament.uk/pa/cm201920/cmselect/cmtreasy/246/246.pdf