Government instructs banks to urgently implement new safeguards to protect customers from scams

The Government has fired a shot across the bow of the banking sector, calling for the immediate introduction of new measures to protect customers - and reimburse scam victims who lose life-changing sums of money.

The Government has today set deadlines for action. If banks fail to act by September, they now risk having changes forced upon them through regulation.

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Commerce and Consumer Affairs Minister Andrew Bayly has written to the NZ Banking Association (NZBA) saying retail banks need to strengthen their processes to give Kiwis better safeguards from organised criminals.

“Altogether, nearly $200 million was lost to scams last year. This needs to change,” he told the Herald.

Bayly has instructed the banks to investigate a voluntary reimbursement scheme to improve consumer compensation, like that in force in the UK where banks are now required to refund customers who are tricked into authorising fraudulent payments to scammers up to a limit of £450,000 (NZ$933,000).

Under current rules, NZ banks are not required to reimburse customers who authorise the payments unless banks have missed obvious “red flags”.

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Bayly has also called on banks to progress work to implement “confirmation of payee” technology - allowing customers to check the name of the account they are sending money to - and wants the Code of Banking Practice updated to protect customers.

“Scams are becoming more sophisticated and causing a growing number of vulnerable Kiwis significant emotional harm and financial loss,” Bayly said.

“I have written to the banking sector, setting out my expectations. I will monitor progress in the coming months.”

Pushed by the Herald on whether he would regulate the banks if they failed to act voluntarily, he replied: “We’re certainly asking them to move at pace.”

Bayly said he had given the banking sector until September to update him on a voluntary reimbursement scheme and until the end of the year to introduce confirmation of payee.

“We’re making a decision at that point. I’m not going to prejudge that. I hope they do come back with something that gives people confidence.”

His letter, obtained by the Herald, is more forthright, warning banks to take “immediate and concerted action”.

“I will be closely monitoring your progress and have asked my officials to keep me updated. I expect you to prioritise this work.”

Months of pressure on retail banks

The announcement follows months of pressure on retail banks amid a surge in investment scam cases where offshore criminal syndicates have exploited our payment system to fleece hundreds of millions of dollars from unsuspecting Kiwis.

Yesterday, Banking Ombudsman Nicola Sladden warned that banks needed to urgently improve fraud detection systems and customer protections.

Banking Ombudsman Nicola Sladden has warned that public trust in the banking sector will erode unless urgent action is taken to protect customers.

She also called for the urgent introduction of a co-ordinated anti-scam centre and for the FMA to conduct a review of the Code of Banking Practice, saying further delays would erode trust in the banking sector.

Consumer NZ said banks had failed to protect customers despite repeated warnings and it was time the Government forced their hand by wielding a “big stick”.

Bayly said the Government supported last year’s recommendations from the Finance and Expenditure select committee on bank scam processes.

In August the committee recommended investigating a voluntary compensation scheme for victims, implementing confirmation of payee, and for the Government to “urge” the NZBA to update its Code of Banking Practice to “offer further measures that help protect consumers from scams and fraudulent activity”.

The committee said the proposed measures would have a positive impact on consumer protection, as banks and consumers grappled with a rising tide of financial crime and bank fraud.

Minister for Commerce and Consumer Affairs Andrew Bayly. Photo / Hagen Hopkins

Bayly agreed, saying: “Bank processes need to be strengthened to give Kiwis better protections.

“A range of industry work is already under way, including establishing a confirmation of payee service, but there is more to be done.

“We agree that the Code of Banking Practice needs updating to protect consumers, and banks should investigate a voluntary reimbursement scheme to improve consumer compensation.”

‘Scams aren’t just a bank problem’

NZBA chief executive Roger Beaumont said banks were committed to helping protect customers from scammers.

Confirmation of payee would start to roll out by the end of the year and an anti-scam centre was up and running, targeting money mules, he said.

“Scams aren’t just a bank problem – people are deceived by fake websites, emails, texts, and social media ads. Government and other industries, particularly social media companies, also need to step up.

Roger Beaumont, chief executive of the New Zealand Banking Association. Photo / Dean Purcell

“We support the Banking Ombudsman’s call for digital platforms to remove fake websites more quickly. They’re often at the start of a chain of events that leads to a scam.

“To better protect New Zealand from scams we need a co-ordinated, multi-sector approach where everyone plays their part.”

Beaumont said banks would investigate a voluntary reimbursement scheme for customers who lose money in authorised payment scams.

“That may help inform any changes to the Code of Banking Practice which sets out current customer expectations for fraud reimbursement.”

Consumer NZ chief executive Jon Duffy said the watchdog’s latest research showed one-in-10 households had lost money to a scam in the past year.

“In reality, the total figure lost to cyber criminals last year is likely to be significantly more than $200m.

“Given the scale of impact on New Zealand households, we are concerned that asking banks to voluntarily reimburse scam victims won’t go anywhere near far enough to address the great, ever-present and evolving threat that cyber criminals pose to us all.”

While Duffy welcomed today’s moves from the Government, he said New Zealand was already so far behind other countries when it came to scam protections.

Consumer NZ chief executive Jon Duffy. Photo / Supplied

“The banks need to catch up, and fast, and it’s on the Government to make that happen.”

‘Asleep at the wheel’

A North Shore real estate agent who lost $100,000 last year in a Citibank-branded investment scam said the announcement came too late for most victims.

Carla O’Neil said banks had been “asleep at the wheel”. She felt their lack of consumer protections had enabled the scammers.

“It’s made a mockery of the banking system. They should feel ashamed.”

The Government had left banks to self-regulate in the area of fraud, creating the terrible situation we were now in, she said.

Carla O'Neil lost $100,000 in a Citibank investment scam last year. Photo / Michael Craig

Banks should immediately implement the UK’s voluntary reimbursement scheme and review cases in which lax security had contributed to victims’ losses.

“They’ve had their chance, it’s time to act now.”

A man who lost $400,000 in an elaborate HSBC-branded investment scam last year said it was great to see the government finally siding with victims.

“But where does this leave the victims who have already had their lives turned upside down due to a banking system fraught with insecurities and under investment?”

Sladden welcomed today’s announcements to strengthen consumer protections.

“We have been calling for stronger action and for a consistent approach across the banking sector to prevent scams.

“We see first-hand the emotional and financial cost of scams. As we continue to move to digital banking, it is critical that customers can bank safely.”

Sladden said comprehensive, mandatory codes of practice were needed for banks, telecommunication companies and digital platforms governing their responsibilities in preventing scams and respective liability.

The Banking Ombudsman Scheme received about 75 scam complaints a month “and behind each of these cases is a story of financial loss and emotional trauma”.

The amounts lost were sometimes hundreds of thousands of dollars.

“The psychological impact can be profound.”

Since July 1, 2023, the scheme had received almost 600 scam-related cases, 32 per cent higher than the same period last year.

Lane Nichols is a senior journalist and deputy head of news based in Auckland. Before joining the Herald in 2012, he spent a decade at Wellington’s Dominion Post and Nelson Mail.