Banks raise concerns over benefit debt recovery powers

UK banks are warning that government plans to crack down on welfare fraud could put them at risk of breaching consumer protection rules. A new law, unveiled on Wednesday, would allow the Department for Work and Pensions (DWP) to recover funds from accounts without a court order. The government department argues this will speed up the debt recovery process and help in the wider fight against welfare fraud.

However, UK Finance, the largest trade body representing UK banks, told the BBC that the plans could undermine banks' own efforts to protect vulnerable account holders. Wednesday's announcement by the government is the culmination of years of efforts by DWP officials to get banks more closely involved in the fight against welfare fraud. A similar plan drawn up by the previous Conservative government failed to pass through parliament before the general election last July.

It is understood that the banking industry has been quietly lobbying against the plans for over a year, but this is the first time they have publicly voiced their concerns. This intervention could cause trouble for government ministers who have spent months trying to win the City's support for their plans to boost economic growth. Currently, the DWP can recover welfare debt from current claimants through the welfare system itself, while also being able to deduct funds through the PAYE system from claimants who are employed.

The department argues that the ability to recover funds directly from claimants' bank accounts will help to recover money from those who are no longer claiming benefits or are self-employed, and will relieve pressure on the court system. Under the new legislation, the DWP would be able to force banks to transfer welfare debts via a "direct deduction order." Banks will be able to charge claimants fees to cover their administrative costs. The department is obliged to first consider three months of a claimant's bank statements and consider whether a deduction would cause them to suffer "hardship" in meeting their basic living expenses.

Daniel Cichocki, head of economic crime and policy strategy at UK Finance, said the plans need further scrutiny to ensure they do not "put vulnerable customers at risk or conflict with existing regulatory and legal obligations." Mr. Cichocki stated that he agrees with the principle of pursuing fraud, but called for the government to introduce controls to "prevent fraud and error from entering the welfare system in the first place." UK Finance pointed out that the Financial Conduct Authority's (FCA) consumer duty could conflict with the government's plans. Introduced in 2023, the duty sets higher standards for consumer protection and gives banks specific obligations to protect customers who are vulnerable due to their financial situation. Banks that breach these rules could face penalties from the FCA or the Financial Ombudsman.

The banking industry has also raised concerns about new measures that would force them to hand over account information of claimants who show indications that they "may have been" overpaid benefits. This could include an account holder's name, date of birth, and account number, but not transaction information. The department can currently only request such financial information in individual cases where there is reasonable suspicion of fraud. It argues that accessing bank information on a mass scale would allow it to discover potential fraud cases that may have been missed, eventually saving taxpayers an estimated £500m a year once the system is fully rolled out.

According to the latest annual figures, overpayments due to fraud reached £7.4bn last year, around 2.8% of total welfare spending. A further £1.6bn (0.6%) was overpaid due to unintentional errors by claimants, and £0.8bn (0.3%) was overpaid due to errors by the DWP. The DWP has said that initially the only accounts that would be flagged would be those showing sustained activity abroad or holding more than £16,000, which is the usual savings limit to be able to claim Universal Credit.

The new system will initially be piloted with a "limited number" of banks and building societies before being gradually rolled out ahead of a full launch in 2029. However, the specific threshold for when someone's details will be handed over remains unclear - the government has said it wants banks to work with them to establish a "fully automated" system. The Secretary of State for Work and Pensions, Liz Kendall, said the new powers would include "new and important safeguards" - including a requirement for an independent body to review the use of the powers annually.