Banks raise concerns over lucrative loan recovery powers

The UK banking industry has warned that government plans to crack down on benefits fraud could put banks at risk of breaking consumer protection laws.

A new law revealed on Wednesday will allow the Department for Work and Pensions (DWP) to withdraw money from accounts without a court order.

Ministers argue this will speed up the debt recovery process and help in a wider crackdown on benefit fraud.

But UK Finance, the largest trade group representing British banks, told the BBC that the plans could undermine banks’ own efforts to protect vulnerable account holders.

The government’s announcement on Wednesday is the culmination of years of work by officials at the DWP on how to get banks more closely involved in the crackdown on benefit fraud.

Similar plans drawn up by the previous Conservative government failed to pass through Parliament before last July’s general election.

The banking sector is understood to have been quietly lobbying against the plans for more than a year, but this is the first time they have publicly raised concerns.

The intervention could cause a headache for ministers who have spent months courting the city to bring them on board in their plans to boost economic growth.

At the moment, the DWP can recover benefit debts from current claimants through the welfare system, while it can also deduct money from claimants who are employees through the PAYE system.

It argues that the ability to charge money directly from claimants’ bank accounts will help get money back from people who are no longer on benefits or who are self-employed, and reduce pressure on the court system.

Under the new law, the DWP will be able to force banks to transfer benefit loans through a “direct cut order”. Banks will be able to charge the claimant a fee to cover their administration costs.

The Department would first be obliged to consider three months of the claimant’s bank statements, and consider whether the deduction would mean they would have “difficulty meeting essential living expenses”.

But Daniel Cichocki, director of economic crime and policy strategy at UK Finance, said the schemes needed further attention to ensure they “do not pose a risk to vulnerable customers, or conflict with existing regulatory and legal obligations.” Don’t clash”.

Mr Cichocki said he agreed with the principle of moving forward after fraud, but called on the government to impose controls to “prevent fraud and error in the benefits system in the first place”.

UK Finance, which counts most of the big retail banks among its members, has pointed to the Financial Conduct Authority (FCA) consumer charges as an area it believes is out of line with the government’s plans. May be in conflict.

This charge, implemented in 2023, sets higher standards for consumer protection and gives banks a specific obligation to protect customers who are vulnerable due to their financial situation.

A bank that breaks those rules can be penalized by the FCA, or Financial Ombudsman.

It is also understood the banking industry is concerned about new measures forcing them to hand over account information of claimants where there are indications they have been “wrongfully” paid benefits.

This may include the account holder’s name, date of birth and account number, although transaction information will be excluded.

The department can currently only demand financial information where it has reason to suspect fraud, and only in individual cases.

It argues that greater access to large amounts of banking information will help it catch potential fraud cases that might otherwise go undetected, ultimately saving the taxpayer around £500m a year once the system is fully implemented.

According to the latest annual figures, overpayments due to fraud last year amounted to £7.4 billion, accounting for about 2.8% of total welfare spending.

An additional £1.6 billion (0.6%) was overpaid due to unintentional errors by claimants, while DWP errors caused overpayments of £0.8 billion (0.3%).

The DWP says that initially, the only accounts to be flagged will be those showing sustained activity abroad or holding more than £16,000, which is the usual savings threshold to be able to claim Universal Credit.

The new system will initially be operated by a “limited number” of banks and building societies, before being gradually phased in before a full rollout in 2029.

But the exact extent of when someone’s details will be handed over is still unclear – and the government has indicated it wants banks to work with them to set up a “fully automated” system.

Work and Pensions Secretary Liz Kendall said the new powers would include “new and significant safeguards” – including requiring the use of the power to be reviewed annually by an independent body.