Is the government’s fight against scams going far enough? That depends on your position

David Sweeney has mixed feelings about the federal government’s proposed crackdown on scams, which promises to introduce hefty fines and new requirements for banks, telecoms operators and social media platforms.

Sweeney’s 89-year-old father was the victim of an offshore investment scam that devastated the family financially and embroiled his son in a five-year battle with three banks to meet their obligations and repay $1 million lost in the scam.

“It knocked my dad out,” he said.

“The stress was incredible. He lost weight, he had to retire and he lost faith in humanity.”

“It was a million dollars. It’s a big moment in your life.”

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Like many, Sweeney is concerned that while the bill is heavily focused on preventing scams, including through fines of up to $50 million, it is short on details regarding compensation or the final form and wording of mandatory codes of conduct that will apply to affected industries.

How long it will take for this law to come into force is another question, given the amount of work to be done, including the development of codes, and the elections approaching next year.

Rejection of the reimbursement model is a victory for banks

The stakes are high.

More than $2.7 billion was lost to scams last year, so banks have been fighting hard against a reimbursement model similar to the one proposed in the UK last year, which requires banks to reimburse fraud victims up to £415,000 ($811,000) unless they are at fault. The UK reimbursement amount has since been reduced to £85,000.

Banks have argued that a refund model would make Australia a magnet for scammers because customers would take more risks if they thought they had a refund safety net. Unsurprisingly, consumer advocates including the Consumer Action Law Centre, CHOICE and others have lobbied for such a model to be put in place.

The bill published on Friday did not adopt the reimbursement model and the banks were happy about it.

Financial Services Minister and Assistant Treasurer Stephen Jones told media a UK-style refund model risked making Australia a “honeypot” for scammers.

“All the crooks in the world will say, ‘Come to Australia, it’s a victimless crime because the bank will always pay,’ and I think the best approach is to put in place preventative measures,” he said.

The industry would have breathed a collective sigh of relief.

The so-called moral hazard argument – ​​that consumers will take more risks if they believe there is compensation – has been used repeatedly over the years by financial institutions.

A counterargument is that if institutions are accountable, they will have greater incentive to fix systems and trace funds.

For context, a report released last year by ASIC said the big four banks had repaid less than 4% of the $558 million their customers lost to scams in the year to June 2022.

The overall approach of the four major groups to fraud was “highly variable” and “less mature” than expected and they had “inconsistent and narrow approaches” to determining liability.

Consumer associations continue to fight for a refund

Consumer advocates welcomed the bill, particularly the tough penalties for violations.

Consumer Action Law Centre chief executive Stephanie Tonkin said the aim of the laws was to prevent scams through principles that businesses responded to and regulators enforced.

She said that while the anti-scam laws were welcomed, the government had missed the opportunity to introduce the most effective prevention approach through a reimbursement model that encourages investment of the level needed to stop scams now and in the future.

“Without a presumption of reimbursement, a very large number of complaints will be filed by victims of fraud, and will have to be determined on a case-by-case basis, on complex issues and with several companies from different sectors,” she said.

“This approach is completely unworkable and, realistically, disputes could take years to resolve. We will be pushing through consultations to ensure that reimbursement is included in the codes of practice.”

The bill provides for a single external dispute resolution (EDR) system for all fraud complaints. The Australian Financial Complaints Authority (AFCA) is expected to take on this role with increased funding.

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But its effectiveness will depend on how it deals with the hundreds of thousands of scams reported each year. If it singles out test cases to set a precedent, it will help with the processing of cases, but it remains to be seen what that will look like.

At the same time, Tonkin said consumers will continue to lose money to scams for the foreseeable future, particularly as scammers have innovated and used AI.

“While the Deputy Treasurer has heard our calls for a one-stop shop for consumers to complain about scams, we will wait even longer – possibly until 2026 – for consumer rights to be enshrined in future codes of practice. The status quo in the meantime is unfair and unacceptable,” she said.

Banks were warned of scam months before father lost $1 million

David Sweeney has said his journey to get compensation for his parents, who were defrauded by fraudulent online investment firm Option.FM, involved repeatedly writing to three banks.

For five years they told him they were not responsible because his father had authorized the payments, even though it was fraud.

“The banks simply manipulated us,” he said.

In a letter sent by a senior bank executive in 2018, Sweeney was told ASIC had failed to warn the bank of the scam.

“I can confirm that at no time has ASIC issued any notice to the Bank or any advice that Option.FM is or may be fraudulent,” the executive wrote.

“Again, I reiterate that the Bank has never received any direct communication from ASIC to alert it that Option.FM is or may be fraudulent.”

October 2020 changed the game when a Freedom of Information (FOI) request filed by Sweeney with ASIC put the banks in the hot seat.

The freedom of information request reveals that ASIC wrote to more than 13 banks in June 2015 warning them that Option.FM, the organisation that defrauded Sweeney, was a “telephone solicitation scam” offering “non-existent financial products”. ASIC’s letter said action was needed to “prevent further transfers from being made by Australian investors”.

ASIC recommended in the letter that banks put in place a process to detect and block any transfers linked to Option.FM. It suggested that banks conduct internal investigations to identify customers who may have been caught up in the scam and transferred funds, in order to warn them.

The ASIC letter was sent four months before Sweeney’s father created an account and subsequently fell victim to fraud.

Simply put, the banks ignored ASIC’s advice and only paid compensation when a customer made them aware of the letter.

The Sweeneys received an apology and settlement offers on condition they agree to secrecy. The ABC cannot name the banks involved because of the agreement.

“My family’s experience was hidden behind confidentiality,” Sweeney said.

“How many other confidential agreements are there in which the bank could have done more? This is deeply unfair.”

Action to address the problem has been slow to come. Billions of dollars have been lost and victims’ lives have been turned upside down, with the financial and emotional toll leading some to suicide, marital breakdown or being forced to work beyond retirement age.

Whether this is sufficient or not depends on where you are.

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