The government is facing a row over a crackdown on benefit fraud that could place banks in breach of consumer protection laws.
The Department of Work and Pensions () has set out details of which type of bank account activity involving someone receiving benefits that will be targeted.
The says that initially, the only accounts to be flagged would be those showing sustained activity abroad or holding more than £16,000, which is the usual savings limit for being able to claim Universal Credit.
However, it is believed that, in time, the scope of the fraud checks on the accounts of benefit recipients would be extended. Eventually, there will be a fully automated system to identify any unusual activity involving the bank accounts of those who receive benefits.
The new regime would allow the to reclaim money from accounts without a court order. Ministers argue this will speed up the debt recovery process and help contribute to a wider crackdown on benefits fraud.
But UK Finance, the biggest business group representing British banks, argues the plans could undermine the banks’ own efforts to protect vulnerable account holders.
Daniel Cichocki, director in economic crime and policy strategy at UK Finance, said the plans need to be looked at further to ensure they don’t “create risks for vulnerable customers, or conflict with existing regulatory and legal obligations”.
Mr Cichocki said he agreed with the principle of going after fraud, but called on the government to introduce controls to “prevent fraud and error entering the benefits system in the first place”.
UK Finance pointed to the Financial Conduct Authority’s (FCA) consumer duty as an area that it believes could be in conflict with the government’s plans.
The duty, introduced in 2023, set higher standards for consumer protection and gave banks a specific obligation to protect customers who are vulnerable due to their financial situation.
A bank that breaks those rules can be penalised by the FCA, or the financial ombudsman.
The banking industry is also understood to have concerns over new measures forcing them to hand over account information of claimants where there are indications they “may have been” paid benefits incorrectly.
This could include the account holder’s name, date of birth and account number, although transaction information would be excluded.
The department can currently only demand such financial information where it has reason to suspect fraud, and only in individual cases.
It argues greater access to banking information in bulk will allow it to catch cases of potential fraud that would otherwise go undetected, eventually saving the taxpayer around £500m a year once the system is fully rolled out.
The new system will initially be piloted by a “limited number” of banks and building societies, before being gradually phased in ahead of a full rollout in 2029.
The government’s plan is the culmination of years of work by officials in about how to more closely involve banks in benefit fraud crackdowns.
Similar plans drawn up by the previous Conservative government failed to make it through Parliament before last July’s general election.
At the moment, the can recover benefits debt from current claimants through the welfare system itself, whilst it can also deduct money from claimants who are employees through the PAYE system.
There will be a fully automated system to identify any unusual activity (Image: Getty)
It argues the ability to recover money from claimants’ bank accounts directly would help reclaim funds from those no longer on benefits or who are self-employed, and ease pressures on the court system.
Under the new legislation, the would be able to compel banks to transfer over benefits debt through “direct deduction orders”. Banks would be able to charge the claimant a fee to cover their administration costs.
The department would be obliged to consider three months’ worth of bank statements from the claimant first, and consider whether a deduction would mean they would suffer “hardship in meeting essential living expenses”.
According to latest annual figures, overpayments due to fraud amounted to £7.4bn last year, around 2.8 percent of total welfare spending.
A further £1.6bn (0.6 percent) was overpaid due to inadvertent errors by claimants, with £0.8bn (0.3%) overpaid because of errors by the .
Work and Pensions Secretary Liz Kendall said the new powers would include “new and important safeguards” – including a requirement for the use of the power to be reviewed annually by an independent body.