Britain’s banking industry has warned that government plans to tackle welfare fraud could put banks at risk of breaching consumer protection laws.
A new law unveiled on Wednesday would allow the Department for Work and Pensions (DWP) to recover money from accounts without a court order.
Ministers say this will speed up the debt recovery process and contribute to a wider crackdown on welfare fraud.
But UK Finance, the largest business group representing Britain’s banks, told the BBC the plans could undermine banks’ efforts to protect vulnerable account holders.
The government’s announcement on Wednesday is the culmination of years of work by DWP officials on how to involve banks more closely in cracking down on welfare fraud.
Similar plans drawn up by the previous Conservative government were not passed by Parliament before last July’s general election.
The banking industry has apparently been lobbying against the plans for more than a year, but this is the first time it has publicly expressed its concerns.
The intervention could cause headaches for ministers, who have spent months courting the City in a bid to win them over to their plans to boost economic growth.
Currently, the DWP can recover debts from current claimants through the welfare system itself, while it can also deduct money from claimants who are employees through the PAYE system.
He argues that being able to recover money directly from claimants’ bank accounts would help recover funds from those who are no longer on benefits or who are self-employed, and ease pressure on the justice system.
Under the new legislation, the DWP would be able to force banks to transfer their benefit debts through “direct debit orders”. Banks could charge the applicant a fee to cover their administrative costs.
The department would be required to first review the applicant’s three-month bank statements and determine whether a deduction would mean he or she would have “difficulty meeting essential living expenses.”
But Daniel Cichocki, director of economic crime and policy strategy at UK Finance, said the plans need to be further scrutinized to ensure they do not “create risks for vulnerable customers or come into conflict.” conflict with existing regulatory and legal obligations.
Mr Cichocki said he agreed with the principle of tackling fraud, but called on the Government to introduce checks to “prevent fraud and errors entering the benefits system in the first place”.
UK Finance, which counts the vast majority of major retail banks among its members, has highlighted the Financial Conduct Authority’s (FCA) consumer duty as an area it believes could conflict with the government’s plans .
This obligation, introduced in 2023, sets higher standards for consumer protection and gives banks a specific duty to protect customers who are vulnerable due to their financial situation.
A bank that breaches these rules may be sanctioned by the FCA or the Financial Ombudsman.
The banking industry also appears to be concerned about new measures requiring them to hand over claimants’ account information when there are indications that they “may” have received benefits incorrectly.
This could include the account holder’s name, date of birth and account number, although transaction information is excluded.
The ministry can currently only request such financial information if it has reason to suspect fraud, and only in individual cases.
It claims that better access to bulk banking information will allow it to detect cases of potential fraud that would otherwise go unnoticed, saving the taxpayer around £500 million a year once the system is fully rolled out.
According to the latest annual figures, overpayments due to fraud totaled £7.4 billion last year, around 2.8% of total welfare spending.
A further £1.6 billion (0.6%) was overpaid due to unintentional errors by claimants, and £0.8 billion (0.3%) was overpaid due to DWP errors.
The DWP says that initially the only accounts to report would be those demonstrating sustained activity abroad or holding more than £16,000, the usual savings limit to qualify for Universal Credit.
The new system will initially be piloted by a “limited number” of banks and building societies, before being phased in with a view to full rollout in 2029.
But the exact threshold at which a person’s information will be handed over is still unclear – and the government has indicated it wants banks to work with them to establish a “fully automated” system.
Work and Pensions Secretary Liz Kendall said the new powers would include “new and important safeguards” – including a requirement that the use of the power be reviewed annually by an independent body.
