Online bank rules falling short

Ombudsman Liz Brown says the rules on internet banking are still being formulated. Picture / Mark Mitchell

The banking industry still lacks clear guidelines on liability for internet scam losses, says the Banking Ombudsman.

Liz Brown said yesterday that online banking was still relatively new, so consistent rules on liability for losses had not been developed.

"The rules are not set. There's no law which tells you who has to carry the loss - whether it's an innocent customer or an innocent bank, and very often we are talking about two innocent parties.

"Unlike, say, the use of cards, where you've got some rules in the Code of Banking Practice, there really is nothing out there."

Brown, who has been Banking Ombudsman since 1995, yesterday released her annual report and a collection of case notes detailing complaints investigated by her office over the year.

She had received complaints from customers who had been the victims of internet fraud "and who felt that their banks should bear at least part of the responsibility for their losses".

The Bankers Association is carrying out a review of the code, expected to be completed by the middle of next year.

Brown hoped the review "will help to remove uncertainties and to establish standards in this increasingly important area of banking practice".

It should "at the very least" include an undertaking from banks that when they provided new services, they would offer the same level of protection against fraud as they did with all their existing services.

"The actual method may be different but the general level of protection should be the same."

Brown believed the issue was best dealt with by way of the code rather than through legislation.

"It's a fast-moving area but it takes a long time to get law through and on to the statute books. There's quite a possibility that by the time the law is there it's moved on and we need something else.

"Good codes of practice can be amended more quickly and move to deal with developments as they occur."

A spokesman for the National Bank said it paid out on internet fraud losses on a case-by-case basis. A Westpac spokesman said the bank had paid out in all of the fewer than 50 cases of internet fraud where customers' funds had been irretrievably lost.

But Brown said banks' terms and conditions had not in all cases kept up with online banking.

Some banks appeared to have updated only some sections of their standard contracts when introducing internet banking, "with the consequence that we sometimes identify fundamental inconsistencies between different parts of the same contract, making it difficult, if not impossible, to apply their terms in a coherent manner".

The trials and tribulations of Mr Z

Mr Z took a job advertised by email requiring him to accept payments into his account for goods purchased from an overseas organisation, deduct a commission and forward the money to the vendor.

After accepting a payment of several thousand dollars and sending off a money order to his "employer" overseas, he became suspicious and telephoned the police and his bank, neither of whom were able to say whether there had been any criminal activity.

Mr Z then contacted the couple from whose account the payment had originated. They knew nothing about the transaction. Mr Z tried to cancel the money order but was unable to. Two days later, the first payment into his account was reversed, leaving him with an overdraft he couldn't repay. His bank threatened to pass the debt to a collection agency and also cancelled his credit card.

Mr Z couldn't understand why he was being held entirely responsible for the debt when the couple had been tricked into disclosing their internet banking password. He complained to his bank but was told he was lucky not to be charged with a criminal offence.

After making a complaint to the Banking Ombudsman and discussing the matter, Mr Z accepted his bank's terms to repay the overdraft in instalments.