Anthony Browne is MP for South Cambridgeshire and a member of the Treasury Select Committee
During the last few years, fraud has become the most common cause of crime, causing misery to millions of people and destroying thousands of livelihoods. It has taken off so rapidly because the internet and mobile telephony have made it far easier for criminals to contact victims, and legislation and industry practice have not kept pace. Almost all fraud is now enabled by online firms.
In a recent Treasury Select Committee report, we suggested a whole range of reforms to tackle fraud, many of which the Government is taking forwards, and hopefully it will do more in an upcoming Economic Crime Bill in the new parliamentary session starting next month.
But online companies such as Google, Facebook, Microsoft, Instagram and WhatsApp also need to live up to their responsibilities. That means doing what they can to stop fraud happening in the first place, but also compensating victims when they have fallen for fraud promoted by the online companies. Unlike banks, they are refusing to do this.
At a Treasury Select Committee session, representatives of Facebook and Google squirmed when I grilled them about why they do not compensate victims, insisting that they wanted to stop fraud happening in the first place. It is a good ambition to eliminate all online-enabled fraud, but fraudsters are incredibly entrepreneurial, and will work out ways of evading whatever barriers Google and Facebook put in the way.
I have been speaking to ministers in all relevant Government departments; to consumer groups, fraud campaigns, and regulators, including the FCA, Ofcom and Payment Systems Regulator, and to online firms themselves, making the case that online companies that promote fraud should be made to compensate victims.
There is a simple moral argument: those who profit from fraud should pay the costs. This would provide relief to those customers who are not entitled to compensation from banks if they can instead get compensation from the online firm that advertised the fraud to them.
But there is a simple practical argument, too: as long as online companies profit from promoting fraud but don’t pay the costs, they will not have an internal financial incentive to invest in deterring it. The banks pay some of the cost of fraud, and I have seen first hand how that mobilises them to do whatever they can to reduce their fraud bills. If fraud compensation costs a company £100 million a year, it is worth its while investing in teams to stop it. Without that incentive, the task would become a regulatory box-ticking and communications exercise.
The principle of getting online firms to compensate victims is widely supported, and not just by consumer groups and fraud campaigners. In evidence to the Select Committee, ministers made it clear that they accept the principle of the argument: incentives need to be aligned.
It is clearly problematic to have one industry profiting from promoting fraud while others are trying to stop it. There are other ways to impose costs on fraud-promoting online companies, such as by fining them – but that does nothing directly to help victims, and requires strong enforcement of a well-targeted penalties regime. Experience tells us that there will be few fines, and online firms will simply focus on legal ways to avoid getting fined, rather than actually stopping fraud.
When the Select Committee said that online firms compensate victims of fraud, the recommendation was welcomed and made headline news, but it was also greeted with some scepticism from some commentators and officials: it’s a great idea in principle, they said, but how could it be made to happen? Well, here is how.
The scheme (called the Contingent Reimbursement Model) by which banks compensate fraud victims is voluntary – and flawed. All main banks are part of it, but some like TSB are not. The banks decide which victims get compensation and which don’t, with the result that levels of compensation vary massively from bank to bank.
The Government is legislating to make it mandatory for banks to be a member of the scheme, and also to have a standard set of rules to decide when victims should be compensated and when not (there is wide agreement that if a customer has been grossly negligent – for example, insisting that a bank transfers money to a fraudster they have been warned about – then the customer is not entitled to compensation).
This new regime will be overseen by the Payment Systems Regulator, which is part of the Financial Conduct Authority. This legislation could be extended to cover online firms. The online firms do not have financial relationships with consumers, so the compensation should still be paid by the banks.
But the banks should then be able to reclaim the compensation from the online companies, either directly or through an industry fund, in the same way that insurance companies settle between themselves. Generally, it seems fair that banks and online firms pay half the compensation each, but in incidences where the bank is not liable to compensation, the online firm should pay all of it.
Obviously, online firms should only pay compensation when they promoted the fraud in the first place; but, equally, if they promoted a fraud, then the victim should always be entitled to compensation. It is not reasonable to expect individual consumers to be able to carry out greater due diligence than the world’s most technologically advanced companies.
The only resistance to this approach is from the online firms. They are worried about how such change would affect their profits, but the fraud bill will be small change for the richest companies on the planet. When they tell me their focus is eliminating all fraud in the first place, my response is: excellent – then you won’t have any compensation to pay.
The online firms are making a major strategic error. Like all firms, they have a licence from society to operate. They will lose this if they consistently defend the indefensible – and demanding the right to profit from promoting fraud while refusing to pay the costs is clearly indefensible.
It is inevitable they will have to do so, and it would be best for them to embrace the inevitable. Accepting that they should pay the cost of fraud would be a huge PR win for a scandal-hit industry, compared to being forced to do it kicking and screaming. After countless outrages, it would show that online firms have learnt their lesson: doing no evil needs to be more than just a motto.