The government’s announcement on Wednesday is the culmination of years of work by officials in DWP 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.
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 raised concerns publicly.
The intervention could cause a headache for ministers, who’ve spent months courting the City, in a bid to bring them on side with their plans to boost economic growth.
At the moment, the DWP 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.
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 DWP 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”.
But 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, which counts the vast majority of the big retail banks among its members, 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.
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