Great sadness in a financial win over banks

Last week Carla O’Neil and Borja Ares achieved something remarkable. They held our banks to account for failing to spot an obvious sign of a scam taking place.

A fake investment crime cost them their life savings – a total of $450,000 combined. Pause and breathe that in. It’s a lot of money.

They clawed back small amounts from ASB’s money-mule, but have now proven their own bank, BNZ, was careless and must repay 70% of their remaining losses.

It is the most traction ever achieved, in making our banks responsible for authorised fraud. Their cases highlight banks can’t turn a blind-eye to any indication of a scam.

Despite me trying to tell these two consumer-champions they would have physically shifted the ground beneath the feet of our banking industry, there was no celebration.The day was steeped in sadness.

As the hours progressed, victim after victim, people they have come to know and support, were receiving letters from the Banking Ombudsman saying they would get absolutely nothing back. Borja is still owed close to $100,000 and Carla, $25,000. It was a numb day.

What went wrong for the other victims?

It came down to the method they used to pay the criminal – internet banking.

It's an absolute travesty when I compare two cases side by side. Carla walked into a branch with “Citi bank” written on the payment form, along with an ASB account number belonging to a criminal money-mule. She was saved by the ombudsman because her bank had ignored the ‘red-flag’ (paying one bank via another bore the hallmarks of a scam).

Another victim, Jo Hurley, lost $350,000 and wrote “Citi bank bonds” in ANZ’s internet banking system, alongside an ASB account number. Both women notified their bank they were trying to pay Citibank via ASB. Yet Jo has been told to accept that her bank, ANZ, is off the hook and she will get nothing back.

The Banking Ombudsman, Nicola Sladden, used the logic that payments via internet banking are fully automated and she can’t tell banks what fraud systems or settings to put in place.

So, blow me down, she gave the banks an exemption. They can turn a blind eye to Jo writing “Citi bank bonds” in the reference field because the payment was electronic.

What curious logic. How do you hold a human to higher account than a machine? There is no equivalence for consumers. It also creates a moral hazard. Banks can now encourage as many payments down the internet channel as possible, liability free.

It flummoxes me the ombudsman’s logic rests on not having the mandate or laws in place to tell banks how to operate their fraud systems. In my view she doesn’t need this, to uphold these cases.

Banks make their own commercial decisions and none of us can judge who is the safest or who has the best fraud detection systems. The only way to deliver consistency for consumers, is to insist banks can’t turn a blind-eye to scam indicators, when using any payment method.

We don’t need to explain to banks how to achieve this, or dictate their fraud settings. They’ll quickly figure it out, based on the liability they face.

The ombudsman dished up this get-out-of-jail card for banks because internet banking is automated. Yet it isn’t. New Zealand is a museum of payment technology. Most of the world is on ‘instant’ or ‘real-time’ payments, but ours take 30 minutes to 3 hours to get processed. That time-gap is more than branch staff get to check a payment. Banks have the time, but aren’t required to use it.

A Government Inquiry

This is so serious for the victims denied justice, the whole matter requires a Government Inquiry. In the UK, banks are called before parliament with ‘please explain’ demands regarding fraud protection.

We have granted them the social licence to self-regulate bank accounts and payments, but they have failed to uphold that privilege and engage with the ombudsman in good faith, when consumers are being harmed.

Banks repeatedly ignore the ombudsman’s advice

Recent Stuff investigations reveal the ombudsman’s Fraud Note in March 2023 was largely ignored by banks. The intentions were clear – more training, term deposit fraud warnings and pop-up internet warnings.

The ombudsman appears to be flustering and has told victims that banks are not obliged to listen to her recommendations, unless a specific customer is being scammed.

Could ignoring the ombudsman be a one-off? Heck no. Like a pantomime, there’s more. In one of the decisions given to a victim, I have discovered banks slept through a second recommendation – to warn account names and numbers were not matched. Plus, the warning should be proximate (right under our nose, when making a payment).

The ombudsman conveyed this five months ago in August. Westpac implemented a minimum warning, with no link to the issue of fraud. I have checked ANZ and ASB’s banking apps and they have not bothered.

This is now mighty uncomfortable. How does the Banking Ombudsman Service maintain its claim to independence when it hides the issues it raises with banks? Then it defends their right not to engage in good faith. Given the social licence granted to self-regulate, the banks’ actions are indefensible.

The lid is lifted on how ineffectual and powerless our Banking Ombudsman is. The banks have no fear. No agency or regulator (Reserve Bank or Financial Markets Authority) can make them improve security, because bank accounts, payments, and action on fraud and scams are all at their discretion.

There’s no profit in security. The banks make up the rules, own the payment system, write their own banking code of practice, sit on the banking ombudsman’s board and restrict the terms of reference she operates under, keeping a short leash. They collectively abide by the ‘no-one-blink model’. Government intervention is urgent.

Readers should always seek specific independent financial advice appropriate to their own circumstances.