FINAL NOTICE

_______________________________________________________________________

To: Tesco Personal Finance plc



1.
ACTION

1.1.
For the reasons given in this Final Notice, the Authority hereby imposes on Tesco
Personal Finance plc (“Tesco Bank”) a financial penalty of £16,400,000 pursuant to
section 206 of the Act.

1.2.
Tesco Bank agreed to settle at an early stage of the Authority’s investigation and
therefore qualified for a 30% (Stage 1) discount under the Authority’s executive
settlement procedures. Were it not for this discount, the Authority would have
imposed a financial penalty of £23,428,500 on Tesco Bank.

2.
SUMMARY OF REASONS

The Cyber Attack

2.1.
Tesco Bank was the subject of a Cyber Attack in November 2016. The attackers
most likely used an algorithm which generated authentic Tesco Bank debit card
numbers and, using those “virtual cards”, they engaged in thousands of
unauthorised debit card transactions. The attackers exploited deficiencies in Tesco
Bank’s design of its debit card, its financial crime controls and in its Financial Crime
Operations Team to carry out the attack. Those deficiencies left Tesco Bank’s
personal current account holders vulnerable to a largely avoidable incident that
occurred over 48 hours and which netted the attackers £2.26 million. The attack
did not involve the loss or theft of customers’ personal data.

2.2.
The Cyber Attack started at 02:00 on Saturday, 5 November 2016. At 04:00, Tesco
Bank’s fraud analysis and detection system started sending automatic text
messages to Tesco Bank’s personal current account holders asking them to call
about “suspicious activity” on their accounts. Tesco Bank first became aware of
the attack as a result of these calls. As the fraud attempts increased, the calls
quickly overwhelmed Tesco Bank’s fraud prevention line.

2.3.
Through a series of errors, which included Tesco Bank’s Financial Crime Operations
Team emailing the fraud strategy inbox instead of telephoning the on-call fraud
analyst (as Tesco Bank’s procedures required), it took Tesco Bank’s Financial Crime
Operations Team 21 hours from the outset of the attack to make contact with Tesco

Bank’s Fraud Strategy Team, a specialist group in the Financial Crime Operations
Team. In the meantime, nothing had been done to stop the attack, the fraudulent
transactions multiplied, calls from customers mounted and the attack continued.

2.4.
Once the Fraud Strategy Team had been alerted, it determined that the majority
of fraudulent transactions were coming from Brazil using a payment method known
as “PoS 91”. PoS 91 is an industry code which indicated that the attackers were
making Contactless MSD transactions, transactions which rely on magnetic stripe
rules which carry identifying information about the debit card. PoS 91 is used
predominately outside of Europe and has no limits in terms of the value or the
number of transactions. The fact that some of the transactions were successful
suggested that the attackers may have obtained authentic Tesco Bank debit card
“PAN” numbers, the long numbers across the front of debit cards, to make the
transactions.

2.5.
Having identified PoS 91 as the primary channel and Brazil as the source of most
of the attempted fraudulent transactions, Tesco Bank’s Fraud Strategy Team put a
rule in place to block those transactions at 01:48 on Sunday, 6 November 2016.

2.6.
Tesco Bank’s Fraud Strategy Team did not, however, monitor the rule’s operation
and discovered a few hours later, that not only was the rule ineffective, but the
attempted fraudulent Brazilian transactions were increasing, reaching a peak of
80,000 by Monday, 7 November 2016 (with Tesco Bank’s systems blocking
approximately 90%). The rule was ineffective because the Fraud Strategy Team
erroneously used the Euro currency code instead of Brazil’s country code when it
coded the rule designed to block PoS 91 transactions originating in Brazil.

2.7.
Having discovered their mistake, Tesco Bank’s Fraud Strategy Team redrafted the
rule, but a residual number of PoS 91 transactions continued to go through Tesco
Bank’s authorisation and fraud detection systems. Unable to solve the problem,
the Fraud Strategy Team called external experts to help them. It took Tesco Bank
until 00:59 on Monday, 7 November 2016 for the external experts to uncover the
problem. The residual PoS 91 transactions were attributable to a coding error which
Tesco Bank’s Financial Crime Operations Team had made when it originally
programmed the fraud detection system.

2.8.
Once it was alerted to the incident on Sunday, 6 November 2016 at 15:00, Tesco
Bank’s senior management analysed the situation and took immediate action. At
23:30 on Sunday, 6 November 2016, it decided to block all online transactions and
contactless transactions for debit cards, excluding Chip & PIN, ATM and online
banking. The block was implemented at 03:35 on Monday, 7 November 2016.
Tesco Bank removed it on Monday, 7 November 2016 at 17:10 and by Wednesday,
9 November 2018 at 08:00, it was able to remove the remaining blocks that
prevented some customers from using Chip & PIN and ATM machines and normal
banking operations resumed. Senior managements’ actions stopped the fraudulent
transactions. They updated customers regularly and deployed significant resources
to return customers to their previous financial position.

Effect on customers

2.9.
Although Tesco Bank’s controls stopped almost 80% of the unauthorised
transactions, the Cyber Attack affected 8,261 out of 131,000 Tesco Bank personal
current accounts. Personal current account holders received text messages which
were likely to cause customers distress in the early hours of the morning. Some
customers suffered embarrassment and inconvenience when they were unable to
make payments using their debit cards. Some experienced long call queues and
did not always receive the help they needed from Tesco Bank’s call centre. Tesco

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Bank applied around £9,000 in charges and interest to customers’ accounts and
account balance reductions led to 668 unpaid direct debits on customers’ accounts.

Consumer redress programme

2.10. Following the Cyber Attack, Tesco Bank immediately initiated a consumer redress

programme and tried to limit the effect of the attack on customers. It removed
pending debits from being posted to customer accounts which meant that the total
amount debited from customers’ accounts was £1,830. It also promptly refunded
fees, charges and interest to customers, reimbursed customers for the direct losses
they had incurred, and paid compensation to some customers for distress and
inconvenience. It paid compensation for consequential losses on a case by case
basis.

Co-operation

2.11. Tesco Bank co-operated fully with the Authority. It independently commissioned

expert reports on the root cause of the incident and its financial crime controls. It
provided the reports to the Authority and took prompt steps to examine and revise
its processes and procedures consistent with the recommendations in the reports.
Tesco Bank made three technical presentations to the Authority on an open basis,
accepted responsibility for the events, fully supported the improvements the
external experts recommended and worked closely with the Authority to ensure
that the Authority was apprised of the improvements. Tesco Bank also agreed to
participate in a symposium to discuss the lessons it learned from the attack with
banks, other regulators and law enforcement agencies.

Principle breaches

2.12. Principle 2 requires a firm to conduct its business with due skill, care and diligence.

Tesco Bank is in the business of banking and fundamental to that business is
protecting its customers from financial crime. On the basis of the facts and matters
described in more detail below, Tesco Bank breached Principle 2 because it failed
to exercise due skill, care and diligence to:

(1)
Design and distribute its debit card:

(a)
Tesco Bank never intended for its debit cards to be used for
contactless MSD transactions, but card users could still use that
payment method or “channel”.

(b)
Tesco Bank inadvertently issued debit cards with sequential PAN
numbers. This increased the likelihood that the attackers would find
the next PAN number in the sequence.

(2)
Configure specific authentication and fraud detection rules:

(a)
Tesco Bank configured its authorisation system to check whether the
debit card expired on a date in the future instead of an exact date
and month.

(b)
Tesco Bank programmed its fraud analysis management system at
account level instead of card level. This meant that debit card
transactions for cards that had been replaced did not go through the
fraud analysis management system.

(3)
Take appropriate action to prevent the foreseeable risk of PoS 91 fraud:

(a)
Visa warned its members, including Tesco Bank, about fraudulent PoS
91 transactions occurring in Brazil and the US. Tesco Bank
immediately implemented a rule to block these transactions on its
credit cards, but failed to make parallel changes to its debit cards.

(4)
Respond to the Cyber Attack with sufficient rigour, skill and urgency:

(a)
Tesco Bank’s Financial Crime Operations team failed to follow written
procedures to alert the on-call Fraud Strategy Analyst resulting in a
significant delay in addressing the attack and mitigating the risks to
its customers.

(b)
Once the Fraud Strategy Team was alerted to the attack, it tried to
draft a rule to block the fraudulent Brazilian transactions, but coded
the rule incorrectly.

(c)
Having drafted the incorrect rule, the Fraud Strategy Team failed to
monitor the rule’s operation and did not discover until several hours
later, that the rule was not working and the Brazilian transactions
were multiplying.

(d)
Tesco Bank’s crisis management procedures, including the criteria for
assessing the seriousness and scale of the incident were documented,
however the training materials explaining the stage at which crisis
management should be invoked should have been clearer and the
responsible managers should have invoked crisis management
procedures earlier.

2.13. As a result, the Authority hereby imposes a financial penalty on Tesco Bank in the

amount of £16,400,000 pursuant to section 206 of the Act.

2.14. The Authority makes no criticism of any third party referred to in this Notice.

3.
DEFINITIONS

3.1.
The definitions below are used in this Notice:

(1)
“Act” means the Financial Services and Markets Act 2000.

(2)
“Algorithm” means a sequence of instructions described so precisely that a
computer can follow them to solve a task.

(3)
“Authority” means the body corporate known as the Financial Conduct
Authority.

(4)
“Card Not Present Transaction” means a transaction involving the purchase
of goods or services made when the physical debit card is not used to make
a purchase.

(5)
“Card Present Transaction” means a transaction involving the purchase of
goods or services made when an actual debit card is physically used to make
a purchase.

(6)
“Check Digit” means the final digit at the end of the PAN.

(7)
“Contactless MSD Transaction” means a transaction made when a customer
presents a debit card to a PoS Terminal and the terminal interacts with the

chip associated with the debit card or where a customer makes a payment
with a mobile device.

(8)
“Cyber Attack” means the mass algorithmic fraud attack which affected
Tesco Bank’s personal current account and debit card customers from 5 to
8 November 2016.

(9)
“dCVV” means Dynamic Card Verification Value.

(10)
“LUHN Check” is an algorithm banks use to calculate the Check Digit and to
check that the PAN number is correct.

(11)
“PAN” means primary account number, the long number on the front of a
debit card comprised of 15 digits plus the Check Digit.

(12)
“PCA” means a Tesco Bank personal current account.

(13)
“PoS” means point of sale.

(14)
“PoS Entry Mode” indicates the method a customer uses to make a debit
card payment.

(15)
“PoS Terminal” means the device a merchant uses to accept a customer’s
payment and to transmit it to the bank. Typical PoS Terminals include
electronic terminals and web-portals.

(16)
“Principles” means the Principles for Businesses set out in the Authority’s
Handbook.

(17)
“Relevant Period” means 1 June 2014 to 9 November 2016.

(18)
“Tesco Bank” means Tesco Personal Finance plc.

4.
FACTS AND MATTERS

Background

4.1.
Tesco Bank is a wholly owned subsidiary of Tesco plc. Tesco Bank was originally a
joint venture between The Royal Bank of Scotland plc (“RBS”) and Tesco plc. Tesco
plc purchased RBS’ share in the joint venture on 19 December 2008. Tesco Bank
offers customers a number of financial products including savings accounts,
personal current accounts, credit cards, mortgages, loans, insurance products and
debit cards.

4.2.
Before the establishment of Tesco Bank, Tesco plc and NatWest offered customers
a savings card known as the Tesco Clubcard Plus. The Tesco Clubcard Plus was
linked to customers’ savings accounts and allowed customers to make in-store
purchases and ATM withdrawals and eventually became a Tesco Bank product.
Tesco Bank also offers customers an instant access savings account, a card linked
to those accounts and it started offering credit cards in July 1997.

4.3.
In 2010, Tesco Bank decided to offer personal current accounts to its customers
and, as a feature of those accounts, debit cards. It used Tesco plc’s existing base
of customers as a foundation for the offering by linking the debit cards to its loyalty
reward schemes including the Tesco Clubcard. Tesco Bank introduced the debit
card when it started offering personal current accounts in June 2014. Tesco Bank
used an authorisations system to provide basic authentication, routing, switching

and authorisation services and a separate system to provide fraud analysis and
fraud detection services.

4.4.
The Tesco Bank debit card is linked to a customer’s personal current account. As
at November 2016, at the time of the Cyber Attack, Tesco Bank had approximately
7.6 million customer accounts, including approximately 133,101 personal current
accounts.

The anatomy of a Tesco Bank debit card

4.5.
Tesco Bank’s debit card, like all debit cards, contains a variety of information which
is set out on the face of the card and encoded electronically within the card.

The PAN

4.6.
The PAN is the long number on the front of the card. It comprises 15 digits plus
the Check Digit. The first six digits are the BIN, the number which identifies Tesco

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Bank as the issuer of the card. The next nine digits are unique to the customer’s
account. The remaining single digit at the end of the PAN is the Check Digit
calculated by a LUHN Check. Its purpose is to ensure that the customer or
merchant has not inadvertently transposed the digits in the PAN.

4.7.
Before 13 December 2016, Tesco Bank issued debit cards with random PANs within
a batch of 50,000 numbers. Successive batches of 50,000 numbers would not be
used until all 50,000 numbers in the previous batch had been issued. The result
was that thousands of Tesco Bank debit cards with valid sequential PANs were in
circulation, even though Tesco Bank had neither issued them sequentially nor
intended to issue them sequentially. The result was that debit cards with sequential
PAN numbers made it easier for the attackers to identify authentic debit card
numbers. Following the Cyber Attack, Tesco Bank revised the system it uses to
issue PANs.

Issue date and expiry date

4.8.
The issue date is the date from which the debit card is valid and takes the form of
both a month and a year. The expiry date is the last date the debit card is valid
and takes the form of both a month and a year. Tesco Bank did not programme
its authorisation system to check for an exact month and year when authenticating
the expiry date field on its debit cards. It was only necessary to check that the
expiry date was a date in the future. Following the attack, Tesco Bank revised its
expiry date checks.

Chip and PIN

4.9.
The chip is embedded in the physical debit card and contains track data, the basic
information required to process the card. The PIN is the customer’s personal
identification number. The PIN is validated differently depending upon whether the
transaction is online or offline.

Three digit CVV code

4.10. The card verification value, CVV, is a three-digit code printed on or embedded in

the debit card. The CVV used depends upon the type of transaction. The Tesco
Bank debit card uses three types of CVV:

(1)
CVV: embedded in the magnetic stripe.

(2)
CVV2: printed on the signature panel on the back of the card.

(3)
iCVV: embedded in the Chip.

4.11. Track data is encoded in the debit card’s magnetic stripe or chip. It contains basic

information required to process debit card transactions including the PAN number,
the expiration year, and the CVV/iCVV. Some cards use dCVV, but Tesco Bank did
not design its debit card to have the dCVV feature. Consequently, it did not expect
to receive dCVV data or design its authentication system to check for dCVVs.

4.12. The signature stripe is the white stripe on the back of the physical debit card which

a customer must sign before using his or her card. Depending upon the type of
transaction, the card scheme rules may require the merchant to check the
purchaser’s signature to confirm that it matches the signature on the card.

PoS Entry Mode - methods of making debit card payments

4.13. The PoS Entry Mode refers to the data that is produced that identifies the method

the merchant used to take a customer’s payment. The kinds of payment methods
that can be used to make debit card payments are defined by the card scheme
(Visa in this case) used by the card issuer. The PoS Entry Mode should not be
confused with the actual Point of Sale Terminal a merchant uses to accept a
payment from a customer.

4.14. There are a variety of PoS Entry Modes, but those used by the attackers were:

(1)
PoS 01/10 which indicates that the merchant is submitting the card details
on behalf of a customer. PoS 01/10 is used where the customer provides
his card details to the merchant via telephone or e-commerce or where the
merchant has accepted payment via a carbon copy machine.

(2)
PoS 91 which indicates that the transaction is a Contactless MSD transaction.
PoS 91 is used for two types of Contactless MSD transactions, namely where
(1) the customer makes the payment by placing the card on or near the PoS
Terminal (Card Present Transaction); and (2) the customer makes a
payment by placing a mobile device (which contains the card details) near
the PoS Terminal (Card Not Present Transaction).

Debit card transactions

4.15. A debit card transaction is initiated when a cardholder uses a debit card to purchase

goods or services from a merchant and concludes with the financial settlement of
the transaction. The key stages and entities involved in a Tesco Bank debit card
transaction, from the cardholder’s initiation of the process to the financial
settlement are outlined below.

4.16. Debit cardholders initiate transactions by providing debit card information to the

merchant via a PoS Terminal. Cardholders can do this at the merchant’s premises
(by presenting a physical debit card to a merchant) or remotely (by entering debit
card details into an online retailer’s website. Tesco Bank has no influence over the
way the controls operate in the merchant’s domain. The merchant’s responsibilities
are determined by the card scheme rules and depend on the type of transaction.

4.17. Transactions made when the card is physically used to make the payment are

known as Card Present transactions. Typical PoS Terminals allow the cardholder
to insert the card into a chip-reading device, to position the card on or near a
contactless reader, or to swipe the card through a magnetic-swipe card reader.

4.18. Transactions made when the card is not physically present at the merchant’s

premises are known as Card Not Present Transactions. The cardholder initiates a
Card Not Present Transaction by providing debit card information to the merchant
via a telephone, website or an electronic device like a mobile phone.

4.19. The merchant (via the PoS Terminal) transmits the debit card details and purchase

information to the acquirer. The acquirer is a financial institution which processes
the debit card transaction on behalf of the merchant. The acquirer transmits the
debit card information to the card scheme.

4.20. The card scheme transmits the information to Tesco Bank, the issuer. The card

scheme’s rules codify the responsibilities of each party in the transaction chain.

4.21. The checks which occur during the authorisation stage determine whether the debit

card is valid. Tesco Bank operates a three-stage authorisation process.

4.22. Tesco Bank uses an authorisation system which, at the time of the Cyber Attack,

required it to perform the authorisation checks described below:

(1)
PAN. Determine whether the PAN matches a valid PAN.

(2)
Card status. Determine whether the debit card is active or inactive.

(3)
Expiry date. Determine whether the debit card’s expiry date is a date in
the future. If the expiry date was a date in the past, it would be declined.
If it was a date in the future, the transaction would not be declined.

(4)
PIN attempts. Determine whether more than a specified number of
attempts to enter the PIN have been made. Tesco Bank debit cards could
not “interact” with merchant terminals to generate contactless MSD
transactions because the chip does not contain the dCVV so such
transactions cannot be verified. PINs did not apply to PoS 91 transactions,
so this authorisation check did not apply.

(5)
Account number validation. Determine whether the debit card
corresponds to a Tesco Bank personal current account.

(6)
Account status. Determine whether the personal current account’s status
is valid.

(7)
Usage limit. Determine whether the number of times the debit card has
been used exceeds a pre-determined limit.

(8)
CVV. Determine whether the CVV/CVV2/iCCV matches Tesco Bank’s
records. The type of CVV supplied depends on the PoS Entry Mode which
transmits the information. The CVV2 check is only performed if the CVV2
data has been provided.

(9)
Address Verification System. Determine whether the address provided
matches the address in Tesco Bank’s records.

4.23. If the authorisation system validation fails, the transaction will be declined. If the

transaction passes the validation checks, it passes to the second stage of the
authorisation process.

4.24. After Tesco Bank’s authorisation system validates the debit card, it sends a

message to an internal messaging routing system which, in turn, sends information
to a funds availability checking system. The system determines whether there are
sufficient funds in the customer’s account to cover the transaction. If there are
insufficient funds, it declines the transaction.

4.25. Following the first stage authorisation checks and second stage fund availability

checks, the transaction is then routed to Tesco Bank’s fraud analysis system for

fraud checks. The system assesses the authenticity of the purchase based on a
behavioural score.

4.26. Depending upon which fraud rules are triggered, the system will either

automatically send a message to the customer (typically by text message or email)
or it will decline the transaction.

4.27. As a result of the authorisation process, Tesco Bank can either approve or decline

the transaction. If no decision is made to decline the transaction at any of the
stages outlined above, a message approving the transaction is sent back through
the card scheme and the acquirer to the merchant. If the transaction is approved,
the available balance on the customer’s account will be reduced, but funds will not
be debited from the customer’s account.

4.28. The merchant then sends a message back to Tesco Bank confirming that the

transaction is going ahead at which point the transaction is posted to the customer’s
personal current account and the monies are then debited.

The Cyber Attack

4.29. The Cyber Attack started at 02:00 on Saturday, 5 November 2016 when the

attackers transmitted 579 fraudulent transactions to Tesco Bank using authentic
Tesco Bank debit card PAN numbers. Attempting a small volume of fraudulent
transactions to test the strength of a bank’s financial crime controls is a common
technique criminals use when initiating an attack.

4.30. At 04:00, Tesco Bank’s fraud detection system, started sending automatic text

messages to personal current account holders. The messages said, “This is a
message from Tesco Bank Fraud Department. It’s important we speak with you
regarding your account. Please call us on 0345 366 1281”.

4.31. Customers started telephoning Tesco Bank’s fraud prevention line following receipt

of the messages. It was from these customer telephone calls that Tesco Bank
originally learned about the suspicious activity that would later be known as the
Cyber Attack.

4.32. At 08:00, Tesco Bank’s out of hours team noted that a higher than normal number

of customers were telephoning the fraud prevention line. Tesco Bank’s Financial
Crime Operations Team also observed unusual activity involving customers’
personal current accounts and, at 08:25, sent an email to the Fraud Strategy
Team’s inbox. As the Financial Crime Operations Team would learn later, no one
monitored the Fraud Strategy Team’s inbox at weekends and the correct procedure
was to telephone the on-call Fraud Strategy Analyst.

4.33. By 10:00 the volume of customer calls to the fraud prevention telephone line had

risen to 137% against the volume Tesco Bank forecast for such calls. At 13:45,
the Financial Crime Operations Team sent another email to the Fraud Strategy
mailbox regarding suspicious transactions. By 14:00 the volume of fraudulent
transactions started multiplying.

4.34. At 14:29, a member of Tesco Bank’s Customer Services Team asked for further

information about the volume of calls going to the fraud prevention telephone line.
The member of the Customer Services Team was informed that the Financial Crime
Operations Team had “passed” the concerns about the unusual activity on to the
on-call Fraud Analyst to investigate”.

4.35. In the meantime, the @TescoBankHelp Twitter account started receiving “tweets”

about the incident. The first tweet came at 15:24 on 5 November and a further
four followed. However, the tweets did not cause anyone at Tesco Bank to raise
an incident. Tesco Bank ceased monitoring the tweets at 20:00 and between that
time and 00:00 on 6 November, it received a further 29 tweets, 28 of which referred
to fraud and to wait times on the fraud prevention telephone line.

4.36. At 15:56, another member of the Financial Crime Operations Team sent a further

email about the suspicious transactions to the Fraud Strategy mailbox. At 17:32,
a member of the Customer Services Team again raised questions about the
suspicious transactions and asked whether they could involve compromised debit
cards. The team explained that they had not yet received a response from the on-
call Fraud Analyst.

4.37. Later that evening, at 21:30, the out of hours team, concerned about the

increasingly high volume of calls to the fraud prevention line, tried to raise a “P1
Incident” with Tesco Bank’s Service Desk. A P1 Incident is the highest incident
level on a four-level scale and includes any incident where customer information
security or IT security has been compromised. Tesco Bank’s Service Desk declined
to raise an incident because the suspicious transactions did not involve IT matters.
The Service Desk did, however, contact the Operations Incident Manager.

4.38. At 22:40, the Major Incident Manager tried unsuccessfully to call the Business

Incident Manager because the Customer Operations Incident Management Rota for
that weekend did not list the correct telephone number for the on-call Business
Incident Manager. The Major Incident Manager then telephoned another Business
Incident Manager and, at 23:00, that Manager telephoned the on-call Fraud
Strategy Analyst. At this point, 21 hours had elapsed since the first suspicious
transaction entered Tesco Bank’s authorisation systems and almost 15 hours had
passed since the Financial Crime Operations Team sent the first email to the Fraud
Strategy Team’s inbox.

4.39. Alerted to the suspicious activity, the on-call Fraud Strategy Analyst notified others

and, working together, they operated as the “Fraud Strategy Team” that weekend.

4.40. In the meantime, the attempted fraudulent transactions continued to rise. By

22:00 on Saturday night they reached a peak of 46,000 with Tesco Bank’s systems
blocking 74% of them.

4.41. Having determined that the majority of the suspicious transactions were coming

from Brazil, the Fraud Strategy Team, working remotely, decided to block all MSD
contactless transactions originating from Brazil. To accomplish this, the Fraud
Strategy Team drafted a rule change to the fraud analysis system which they
implemented at 01:45. The Fraud Strategy Team then agreed to meet at Tesco
Bank’s Glasgow offices at 07:00 to review the situation. They did not put in place
a system to monitor the effectiveness of the rule change.

4.42. As agreed, the Fraud Strategy Team met at Tesco Bank’s Glasgow office at 07:00.

They discovered that not only was the rule change not working, but the Brazilian
transactions were increasing. It took the Fraud Strategy Team almost four hours
to discover their mistake (that they coded the rule using the Euro currency code
instead of Brazil’s country code) and to re-draft the rule. They took the additional
steps of blocking e-commerce transactions in the US which used PoS 81 and of
blocking all US transactions excluding PoS 90 and 05 (magnetic stripe read and
Chip & PIN).

4.43. At 15:00, Tesco Bank invoked its crisis management procedures.

4.44. Despite these steps the fraudulent activity continued. Unable to understand why

the rules they had drafted had not completely blocked the fraudulent transactions,
the Fraud Strategy Team asked external fraud experts to review the rules on Tesco
Bank’s authorisation and fraud detection systems.

Monday, 7 November 2016

4.45. In the early hours of Monday morning, the external fraud experts determined that

the authorisation system was not blocking the residual transactions because Tesco
Bank had configured the system at customer account level rather than at the
individual debit card level. This meant that transactions involving debit cards that
Tesco Bank had previously replaced as lost or stolen, were not passed to Tesco
Bank’s fraud analysis system, for fraud detection.

4.46. At 03:35, Tesco Bank implemented a block which stopped the flow of fraudulent

transactions. By that time, the fraudulent transactions had reached a peak of
80,000, although Tesco Bank’s systems stopped approximately 90% of them.

Tuesday, 8 November and Wednesday, 9 November 2016

4.47. Throughout Tuesday, 8 November Tesco Bank took steps to resume normal

customer banking activities. By 08:00 on Wednesday, 9 November, Tesco Bank
could remove the remaining blocks, including the “sticky blocks” that prevented
some customers from using Chip & PIN and ATM machines until they provided
authentication details, and all debit card customers were able to use their cards
again.

The Cyber Attack was foreseeable

4.48. Visa issued a fraud alert to all its members, including Tesco Bank, on 4 November

2015. It warned Tesco Bank about fraudulent PoS 91 transactions occurring in
Brazil and the US, exactly the kind of transactions carried out during the attack.
Following the alert, Tesco Bank’s Financial Crime Operations Team immediately
blocked all PoS 91 transactions for Tesco Bank’s credit cards, but did not make
parallel changes to its debit cards. Visa posted a similar alert on its Global Fraud
Information Portal on 5 November 2015. MasterCard sent an email to all its
members, including Tesco Bank, on 30 September 2016 warning them of a PoS 91
attack that another UK issuer had suffered. The email said, “Fraudulent PoS91
(mag-stripe) contactless transactions have been received from merchants in Brazil,
often preceded by low value/test transactions on US based (small merchant web-
sites). This is a repeat of attacks previously experienced and the subject of advisory
bulletins”. Members of Tesco Bank’s Fraud Strategy Team received the email, but
could not recall taking any action to implement this change on debit cards.

4.49. Although Tesco Bank did not receive the article, Visa Business News published an

article in 2014 which forewarned banks of the events that would subsequently
transpire as the Cyber Attack. The article, “Mitigating Fraud Risk Through Card Data
Verification” warned issuers about contactless fraud using compromised magnetic-
stripe data (among other things). The article stated: “A fraudster has counterfeited
a magnetic-stripe card onto a contactless interface on a mobile device. When using
the contactless interface, the bank should first recognize that this transaction has
a PoS entry mode of 91 or 07 (contactless) instead of 90 (magnetic stripe). The
expected CVV for a contactless interface should be dCVV or iCVV”. Moreover, Tesco
Bank had experienced fraudulent PoS 91 transactions on both its credit cards and
debit cards well before the Cyber Attack.

The effect of the Cyber Attack on Tesco Bank’s customers

4.50. The Cyber Attack affected 8,261 personal current accounts at Tesco Bank. Personal

current account holders received text messages which were likely to cause distress
in the early hours of the morning. Some account holders suffered embarrassment
and inconvenience when they were unable to make payments using their debit
cards and others experienced long call queues and did not always receive the help
they needed from call centre staff.

4.51. Tesco Bank’s fraud analysis system started sending automatic text messages and

emails to personal current account holders at 04:00 on Saturday, 5 November 2016
asking customers to contact Tesco Bank. The system was not configured to stop
sending text messages once a pre-defined level was reached nor to send an alert
to the Fraud Analysts notifying them that a large volume of alerts had been sent to
customers. Tesco Bank disabled the automatic fraud alerts at 09:00 on Sunday, 6
November 2016 when it became clear that customers were not engaging in the
transactions and to reduce the load on its call centre teams.

4.52. Once Tesco Bank itself became aware of the Cyber Attack, it sent a series of text

messages and emails to customers. The first of those messages sent on Sunday,
6 November 2016 commencing at 13:30 and continuing to 22:30 said, “Yesterday
our fraud prevention systems identified suspicious activity on a number of customer
accounts. The suspicious transactions relating to these accounts were immediately
blocked to protect our customers and alerts sent. We are dealing with this as a
matter of urgency but in the meantime the majority of customers can continue to
use their cards using chip and pin functionality. Online servicing, telephony banking
and the mobile app will continue to work as normal. We would recommend
reviewing your payments and letting us know of any suspicious activity otherwise
there is no need to call us at this stage”.

4.53. Tesco Bank sent another series of text messages commencing at 03:00 and

continuing to 07:30 on Monday, 7 November 2016. It said, “Over the weekend,
some of our customers’ current accounts have been subject to online criminal
activity. Our priority is to protect your account so we have taken the precautionary
measure of suspending online transactions from your account, this includes
contactless transactions. You will still be able to withdraw cash and use chip and
pin transactions. We are very sorry for the inconvenience and will let you know as
soon as we resume normal service. For more information visit Tescobank.com/your
community”.

4.54. Tesco Bank started sending text messages to its customers at 03:00 on Monday, 7

November for two reasons. Limitations in its systems prevented it from sending
the text messages to all customers at one time and it wished to ensure that the
customers were aware of the Cyber Attack before Tesco Bank’s then CEO, Mr Benny
Higgins, appeared on the BBC Radio 4’s Today Programme at 07:50 on Monday
morning.

4.55. It is important to note, however, that while Tesco Bank sent text messages to

customers in the early hours of the morning and that those messages alarmed
some customers, Tesco Bank later refined its communication strategy and provided
clearer messages with more specific information to reassure them.

4.56. Tesco Bank’s debit card customers faced long call queues and did not always receive

the help they needed from the call centre. For example, on Sunday, 6 November
2016, Tesco Bank’s fraud prevention telephone line received 3,887 telephone calls
(against a forecasted 61) and that 94.4% (3,669) of the calls were “abandoned”
by customers who tried to call, but were placed “on hold” for too long.

4.57. Following customer complaints, Tesco Bank compensated a number of individuals

including a 74 year-old customer who tried to call Tesco Bank 11 times concerned
that his life savings were lost as a result of the incident; a customer whose account
was debited £450, had not slept and waited for three hours on the phone; a
customer whose account was defrauded, but did not receive a text and who was
advised to check Twitter for the date when funds would be restored; a customer
who received a fraud text which woke up his sick child and who was given the PPI
phone number to call back and did not receive a call back from Tesco Bank; and a
customer with limited lung capacity who had stayed up all night following receipt
of an automated text message alert.

4.58. The amount of fraudulent transactions made on individuals’ personal current

accounts varied. Over 600 customers’ personal account balances were temporarily
reduced, but not actually debited, by between £500 and £1000. Some 646
customers had fraudulent transactions exceeding £1,000 on their personal current
accounts. Twenty-three customers had between £5,000 and £10,000 in fraudulent
transactions on their personal current accounts. One customer had 22 fraudulent
transactions totalling £65,000 on his account. Over 5,000 customers had £0
transactions “approvals” which included hotel check-in authorisation charges,
situations where authorisation was received, but the transaction did not settle and
where the merchant or acquirer reversed the transaction.

4.59. Tesco Bank’s systems automatically applied around £9,000 in charges and interest

to customers’ accounts and account balance reductions led to 668 unpaid direct
debits on customers’ accounts. As set out below, Tesco Bank promptly reimbursed
customers for these charges as part of its redress programme.

4.60. The way in which 8,261 personal current accounts were affected was that when a

customer reviewed his or her account balance, it appeared to the customer that
the account balance had been reduced by the amount of the unauthorised
transaction. In fact, Tesco Bank delayed posting most of transactions arising from
the Cyber Attack. By delaying the posting, it meant that of the 8,261 accounts
affected, Tesco Bank only debited 34 accounts a total of only £1,830 and made
good the amounts debited from those customers’ accounts by 10 November. The
net loss to Tesco Bank was £700,000.

The redress programme

4.61. Following the Cyber Attack, Tesco Bank initiated a consumer redress programme

which removed pending debits from being posted to accounts, refunded fees,
charges and interest to customers, reimbursed customers for the direct
consequential losses they incurred, and paid compensation to customers for
distress and inconvenience on a case by case basis. Only three complaints were
referred to the Financial Ombudsman Service and those that were referred were
upheld in Tesco Bank’s favour.

Tesco Bank’s governance of cyber crime

Tesco Bank’s risk management framework

4.62. The UK Corporate Governance Code (Code) sets standards of good governance for

UK firms and requires firms with a premium listing of equity shares in the UK to
report how they have applied the Code’s provisions. While Tesco Bank is not a
premium listed firm and is not required to comply with the Code, the Code sets the
context for examining Tesco Bank’s approach to the governance of the risk of
financial crime and more particularly, the risk of cyber crime.

4.63. According to the Code, a firm’s board of directors is responsible for determining the

nature and extent of the principal risks it is willing to take to achieve the firm’s
strategic objectives and for maintaining sound risk management and internal
control systems. The board does this by identifying “the nature and extent of the
principal risks” the firm faces and setting its “risk appetite”, the level of “the risks
which the organisation is willing to take in achieving its strategic objectives”. A
firm’s risk appetite is designed to start with its board and to work its way through
the business. The way a firm does this is through its risk appetite framework.

4.64. Tesco Bank’s Board articulates Tesco Bank’s strategic objectives and approves

Tesco Bank’s risk appetite by identifying the level of risk it is willing to take to
achieve its strategic objectives. The Executive Risk Committee (ERC) and the
Board Risk Committee (BRC) are responsible for reviewing emerging trends and
future risks. The ERC oversees Tesco Bank’s risk frameworks and ensures that the
three lines of defence model is operating effectively and that they are managing
their respective risks. The BRC recommends risk strategy and risk appetite
decisions to the Board. The three lines of defence carry out complimentary roles
and functions. Each body, in turn, has a role in developing the policies which take
the Board’s aspirational objectives and translates them into the practical steps
required to implement those objectives.

The Board’s oversight of financial crime

4.65. The ERC identified “Cyber Crime / Financial Crime” as among Tesco Bank’s top

risks. It defined the risk of Cyber Crime / Financial Crime as “Financial Crime losses
and/or associated reputational impact as a result of data theft, malicious systems
outage, information security breach, or material failure of Fraud/AML systems
themselves”. Tesco Bank had a standardised “risk taxonomy”, a regular risk
reporting system, operational risk processes, and it undertook annual scenario
analyses. The Board is responsible for approving Tesco Bank’s Financial Crime
Policy which outlines Tesco Bank’s approach to financial crime. It also established
a variety of committees to monitor and recommend actions to mitigate the risk of
cyber crime including a Cyber Crime Steering Group.

The Board’s Cyber Intelligence Policy

4.66. At the time of the Cyber Attack, Tesco Bank’s Board was operating on a draft Cyber

Intelligence Policy. It defined cyber-related fraud or cyber-crime as “the use of a
computer network for crime ...includ[ing]: cyber enabled fraud including malware
and phishing; disruption or defacement of services including Denial of Service
attacks; content related offences including use of social media to make threatening
or offensive comments; unauthorised access of systems; illegal collection,
modification, disclosure, dissemination and storage of data; and intellectual
property crimes”. (The policy has since been incorporated into another policy.)

The Board’s Financial Crime Risk Appetite

4.67. Tesco Bank’s Financial Crime Policy sets out the Board’s financial crime risk

appetite: “The Bank is committed to preventing and minimising external fraud
losses in keeping with its risk appetite, whilst also considering the implications to
customers. Risk appetite limits are approved by the Board and reviewed at least
annually, as part of the risk appetite governance process”. Tesco Bank’s risk
appetite for external fraud risk loss for the 2016/17 financial year was £13m (1.6%
of its income). Tesco Bank stayed within its risk appetite for external fraud losses
taking into account both the losses arising from the Cyber Attack and all other
external fraud losses arising that financial year.

The Three Lines of Defence at Tesco Bank

4.68. Having established its risk appetite for external fraud losses (including losses

involving cyber-crime), Tesco Bank’s three lines of defence had the job of carrying
out the steps necessary to keep Tesco Bank within the risk appetite set by the
Board.

The First Line of Defence

4.69. The first line of defence (First Line Business Management) is in the Customer

Division. It is supported by the first line of defence risk teams. The first line risk
team relevant to the Cyber Attack was the Financial Crime Operations Team which
is responsible for Tesco Bank’s financial crime and fraud controls, fraud case
management and investigations. The Fraud Strategy Team is part of the Financial
Crime Operations Team.

The Second Line of Defence

4.70. The second line of defence (Operational Risk) is accountable for the “ownership,

development and maintenance of Operational Risk Framework Policies, tools and
methodologies and designing the standards against which effective Operational
Risk Management will be assessed” and is responsible for “providing specialist
advice to the 1st Line of Defence on Operational Risk Management and compliance
with the ORF” (the operational risk framework).

The Third Line of Defence

4.71. The third line of defence (Internal Audit) is responsible for providing the audit plan

and an opinion on Tesco Bank’s control framework four times a year.

The Three Lines of Defence’s work in this area

4.72. Internal Audit raised concerns about the financial crime risks involving the debit

card (referred to as the “PCA”) as early as its launch date. An internal audit report
entitled “PCA Financial Crime (January 2014)” found “weaknesses in the design
with unclear accountability for key financial crime risks such as Internal Fraud,
Stores and Digital (e-crime)”. More specifically, it noted that there was “no end to
end view of the financial crime risks faced by Tesco Bank as a result of launching
PCA”. It recommended that management should assess the “end to end financial
crime risks associated with launching PCA and agree accountabilities for all of these
including those which are out of scope [of the audit]. Accountable owners should
then provide evidence of how these risks are being managed”. Tesco Bank’s senior
management acknowledged the issue and instructed Operational Risk to carry out
such a review.

4.73. Operational Risk carried out the PCA Financial Crime Review in three phases. The

first phase considered the pre-launch PCA Financial Crime Controls. The second
reviewed the effectiveness of the controls during a limited “live proving
friends/family” trial. The third phase reviewed the effectiveness of the controls
following the launch of the PCA to customers.

4.74. The first phase report (5 February 2014) identified a variety of financial crime

control deficiencies including that there were minimal internal fraud controls. The
induction plan for training did not include sufficient training on how to report
suspicions of fraud. The fraud risks and controls were out of date. There was no

fraud response plan in place for the PCA. The roles and responsibilities for
monitoring PCA fraud trends and the management of the PCA fraud detection
systems were not clear. Tesco Bank recognised the risk that the debit cards could
be a target for fraudsters. The resources required to undertake ongoing fraud
analysis and the management of the fraud detection systems were not in place.
The fraud processes were not adequate and further development was required. On
the other hand, the report said that the fraud detection system rules were
“comprehensive and should deliver an adequate level of fraud detection at launch”
although it noted that some “minor additions and amendments” were required. The
risks were closed on 3 June 2014 following the production of a detailed external
fraud risk register completed by the Financial Crime Team.

4.75. The second phase report (23 May 2014) identified two risk issues for resolution.

The first finding (outstanding) was that team managers needed training in the fraud
analysis systems. The second finding was that the quality assurance approach to
the management and oversight of the fraud analysis system and fraud alerts
needed to ensure that there was appropriate end to end oversight in place,
considering the timeliness of the checks needed to ensure that the system was
reviewed.

4.76. The third phase report (23 December 2014) said that volumes of confirmed PCA

fraud remained low, but noted that they were unable to validate the extent to which
the fraud alerts were working properly; the approach to management quality
control checks carried out on the system generated fraud alerts required
improvement.

4.77. Operational Risk carried out a review of the work of Tesco Bank’s Cyber Intelligence

Team, a team within Tesco Bank’s Security Team, was doing to combat cyber-
crime. It published its findings in a report entitled, 2nd Line Risk Assurance Report
Review of Financial Crime Threat Intelligence Review (23 December 2015). The
Cyber Intelligence Team was formed in April 2015 and they analysed intelligence
gathered from a wide variety of sources and provided that intelligence to
appropriate stakeholders across Tesco Bank’s business to ensure that Tesco Bank
managed financial crime within its risk appetite.

4.78. The report acknowledged that the Cyber Intelligence Team had made significant

progress in putting structures in place to bring information about cyber-crime to
the attention of senior management and the relevant business areas and in
identifying current and emerging cyber-crime threats to Tesco Bank generally.

4.79. The report also identified several concerns. It noted that timely data was

“imperative” for an effective threat intelligence framework to make provision for
the “immediate assessment and dissemination of data”, but noted that there were
no timescales in place for processing threat intelligence data. It also said that
there was no clear audit trail to show when intelligence was being received and
processed by the Threat Intelligence Team.

4.80. Five months before the Cyber Attack, Operational Risk carried out a review of CNP

fraud. It published its findings in a report entitled, “2nd Line Risk Assurance Report
Review of: Card Not Present (CNP)” dated 8 June 2016. The review looked at CNP
fraud affecting both Tesco Bank credit cards and debit cards.

4.81. The report noted that the low alert volumes made it difficult to assess a “strong

pattern of CNP behaviours” on the debit cards compared to that of credit cards. It
warned the Financial Crime Strategy Team to continue to enhance CNP MI and to
develop the overall fraud detection rate. The report states that, as at March 2016,
there was significant reliance on customers to inform Tesco Bank of fraud on their
PCA accounts. The actions outlined in the report were addressed and closed on 31
August 2016.

4.82. Following the Cyber Attack, Tesco Bank commissioned a consultancy firm to assess

its financial crime controls, operations and customer experience and to help it
develop a plan to address the gaps it identified. The consultants provided its
findings and recommendations to Tesco Bank in a report entitled, Fraud &
Capability Best Practice Review (15 August 2017).

4.83. The consultants found that Tesco Bank’s senior management had a desire to

manage financial crime risk, but Tesco Bank’s customer security operating model
was behind its peers and “not sustainable”. Among other things, the report
observed that there was limited activity to assess and trace risks from end-to-end
across the control framework and that work had started on the assessment of the
fraud risks and controls in place within each product area, but that work was
constrained by current capacity in the Fraud Strategy area.

4.84. The Tesco Bank executive who presented the report to Tesco Bank’s Executive

Committee thought that the findings were reasonable.

4.85. Tesco Bank’s financial crime governance framework was clear and each body within

the framework had an appropriate role and each body worked together to achieve
the common purpose of mitigating the risk of cyber crime occurring at Tesco Bank.
In particular:

(1)
The Board identified its strategic objectives and approved Tesco Bank’s risk
appetite by identifying the level of risk it was willing to take to achieve its
strategic objectives. Tesco Bank delegated specific work to the ERC (to
oversee the risk frameworks and the three lines of defence) and the BRC (to
recommend risk strategy and risk appetite decisions to the Board).

(2)
The ERC identified cyber crime and financial crime as among Tesco Bank’s
top risks. The BRC recommended and the Board ratified a risk appetite for
financial crime which it divided into internal fraud (zero tolerance) and
external fraud risk which included cyber crime (£13m).

(3)
The first line of defence identified the risks from the perspective of the
business. Operational Risk, as the second line of defence carried out several
risk review and mitigation projects: the PCA Financial Crime Review (a
three-phase project designed to identify and resolve financial crime risks
before Tesco Bank made the debit card available to customers); and
Assurance Reports (one report examined Tesco Bank’s security team
another card not present fraud). The work of Tesco Bank’s internal audit
function was not prominent, but Tesco Bank did commission external audit
reviews from accountancy firms.

4.86. While Tesco Bank’s cyber crime framework was appropriate, the framework is only

as good as the individuals who work within it. Tesco Bank was vulnerable to the

attack because individuals failed to exercise due skill, care and diligence to design
and distribute the debit card, configure specific authentication and fraud detection
rules, take appropriate action to prevent the foreseeable risk of PoS 91 fraud, and
respond to the attack with sufficient rigour, skill and urgency.

4.87. According to a National Audit Office report, the true cost of online fraud is unknown,

but is likely to be billions of pounds. In the year ending 30 September 2016, there
were 1.9 million incidents of cyber-related fraud in England and Wales.

4.88. Financial institutions cannot eliminate the risk of cyber crime. They can, however,

take appropriate steps to mitigate the risk of cyber crime occurring and ensure that
their cyber-crime controls are well designed, that the individuals who design and
manage those controls understand how they work, and that their crisis
management plans are clear and well-rehearsed.

5.
FAILINGS

5.1.
The regulatory provisions relevant to this Notice are referred to in Annex A.

5.2.
Principle 2 requires a firm to conduct its business with due skill, care and diligence.
Tesco Bank is in the business of banking and fundamental to that business is
protecting its customers from financial crime. Tesco Bank breached Principle 2
because it failed to exercise due skill, care and diligence to:

(1)
Design and distribute the debit card:

(a)
Contactless MSD (PoS 91). Tesco Bank did not intend for its debit
cards to be used for contactless MSD transactions because there was
limited support for contactless MSD transactions in Europe and there
were difficulties with the dCVV verification method used to
authenticate the card. Having taken that decision, Tesco Bank did not
take the steps which followed from that decision. It should have
included PoS 91 in the Visa test scripts and configured its
authorisation and fraud analysis systems to decline PoS 91
transactions. The failure to take these steps left Tesco Bank’s
personal current account customers vulnerable to fraudulent
transactions made using PoS 91. Those transactions accounted for
the majority of the fraudulent transactions (£2.24m) which occurred
in the attack.

(b)
PAN numbers. The attackers algorithmically generated authentic
debit card numbers to engage in fraudulent transactions on
customers’ personal current accounts. Tesco Bank was vulnerable to
this because it randomly issued PANs to customers within a batch of
50,000 numbers. The next batch of 50,000 numbers would not be
used until all 50,000 numbers in the first batch had been issued. The
result was that the debit cards in circulation had sequential PAN
numbers. This simplified the attackers’ work.

(2)
Configure specific authentication and fraud detection rules:

(a)
Expiry date. Tesco Bank configured its authorisation system to check
whether the debit card expired on a date in the future, not the exact
month and year. This made it easier for the attackers to get through
the debit card authentication process.

(b)
Fraud detection rules. The Financial Crime Operations Team
programmed Tesco Bank’s fraud analysis system at account level
instead of card level. This meant that transactions involving debit
cards that Tesco Bank had previously replaced as lost, stolen or
expired, did not go through the fraud analysis system. This affected
19,240 debit cards.

(3)
Take appropriate action to prevent the foreseeable risk of PoS 91 fraud:

(a)
Foreseeability. Tesco Bank is a member of both Visa and Mastercard
and receives information from both organisations about the operation
of their card schemes. On 4 November 2015 Visa issued a fraud alert
to its members, including Tesco Bank. It warned Tesco Bank about
fraudulent PoS 91 transactions occurring in Brazil and the US, exactly
the kind of transactions carried out during the attack. Following the
alert, Tesco Bank’s Financial Crime Operations Team immediately
blocked all PoS 91 transactions for Tesco Bank’s credit cards, but they
did not make parallel changes to its debit cards. On 5 November
2015 Visa posted a similar alert on its Global Fraud Information
Service Portal. Tesco Bank is a subscriber to the service and has
access to the portal.

(b)
Preventability. On 30 September 2016, MasterCard sent an email to
all its members, including Tesco Bank, warning them of a PoS 91
attack affecting another UK issuer. The email said, “Fraudulent PoS
91 (mag-stripe contactless) transactions have been received from
merchants in Brazil, often preceded by low value/test transactions on
US based (small) merchant web-sites. This is a repeat of attacks
previously experienced and the subject of advisory bulletins”. The
email advised members to review their fraud and authorisation rules
to ensure that members were protected. Members of the Fraud
Strategy Team received the email, but could not recall taking any
action on the debit cards as a result of it. Moreover, Tesco Bank had
experienced fraudulent PoS 91 transactions on both its credit cards
and debit cards before the attack.

(4)
Respond to the Cyber Attack with sufficient rigour, skill and urgency:

(a)
Failure to follow procedures. The Financial Crime Operations Team
failed to follow appropriate procedures to alert the on-call Fraud
Strategy Analyst during the weekend of the attack. The team
emailed an in-box instead of telephoning the on-call Fraud Strategy
Analyst. In addition, the Customer Operations Incident Management
Rota contained an incorrect telephone number which delayed Tesco
Bank from reaching the on-call fraud analyst. The consequence of
these delays was that the on-call fraud analyst was not alerted until
23:30 on Saturday, 5 November 2016, approximately 21 hours after
the attack began and 15 hours after the Financial Crime Operations
Team originally emailed the on-call Fraud Analyst. As a consequence,
Tesco Bank missed a number of opportunities to identify the severity
of the attack at an earlier stage.

(b)
Crisis Management. Cyber crime is increasing and evolving. Crisis
management is a key element in a cyber-incident response
framework. Having well documented crisis management procedures
is an essential element of a bank’s (or any financial institution’s)
cyber-resilience procedures. It is equally important to ensure that

the individuals responsible for implementing crisis management
procedures understand the procedures and have the appropriate
training to understand how to use the policies and procedures and
that banks rehearse these procedures using a variety of scenarios.
While Tesco Bank had documented crisis management procedures,
including the criteria for assessing the seriousness and scale of an
incident, the training materials explaining the stage at which crisis
management should be invoked lacked clarity. The execution of the
procedures fell substantially below regulatory requirements. The
responsible managers should have recognised the implications of the
attack earlier and they should have invoked Tesco Bank’s crisis
management procedures sooner.

(c)
Coding failures. Once the Fraud Strategy Team became aware of the
high volume of fraudulent PoS 91 transactions, they tried to draft a
rule to block them. However, instead of entering the country code
for Brazil in the country code field, they entered the currency code
for the Euro. This was a mistake and the result was that the rule did
not block the fraudulent transactions.

(d)
Failure to monitor. Having drafted the rule to block the fraudulent
transactions at 01:45 on Sunday 6 November 2016, the Fraud
Strategy Team failed to monitor the operation of the rule and did not
discover it was not working until 07:00. In the meantime, the
fraudulent transactions were multiplying reaching a peak of 80,000
by Monday 7 November 2016 with Tesco Bank’s systems stopping
approximately 90% of them. It took the Fraud Strategy Team over
five hours to uncover their mistake and almost four hours to
implement the correct rule.

6.
SANCTION

Financial penalty

6.1.
The Authority has considered the disciplinary and other options available to it and
hereby imposes a financial penalty of £16,400,000 on Tesco Bank pursuant to
section 206 of the Act.

6.2.
The Authority’s policy in respect of its decisions whether to impose financial
penalties and its calculation of those penalties is set out in Chapter 6 of its Decision
Procedure and Penalties manual (“DEPP”). In respect of conduct occurring on or
after 6 March 2010, the Authority applies a five-step framework to determine the
appropriate level of financial penalty. DEPP 6.5A sets out the details of the five-
step framework that applies in respect of financial penalties imposed on firms.

Step 1: disgorgement

6.3.
Pursuant to DEPP 6.5A.1G, at Step 1 the Authority seeks to deprive the firm of the
financial benefit derived directly from the breach, where it is practicable to quantify
this.

6.4.
The Authority has not identified any financial benefit that Tesco Bank derived from
the breach.

6.5.
Step 1 is therefore £0.

Step 2: the seriousness of the breach

6.6.
Pursuant to DEPP 6.5A.2G, at Step 2 the Authority determines a figure that reflects
the seriousness of the breach. As made clear in DEPP 6.5A.2G (1), the Authority’s
starting point is that, in many cases, the amount of revenue generated by the firm
in question from the relevant business area or product line during the misconduct
period is indicative of the harm or risk of harm arising. DEPP 6.5A.2G (1) also,
however, recognises that such revenue may not be an appropriate indicator of that
harm or risk of harm. In such a case, the Authority will use an appropriate
alternative.

6.7.
The Authority considers that the revenue generated by Tesco Bank from its debit
cards during the Relevant Period is not an appropriate indicator of the harm or
potential harm caused by its breach in this case. This is because the revenue is
not related to the amount of funds which were at risk during the attack.

6.8.
The Authority considers that the appropriate indicator in this case is the average of
the aggregate personal current account balances at risk during the Relevant Period
(“ABR”). The Relevant Period began on 1 June 2014 (the date Tesco Bank launched
the Debit Card) and ended on 9 November 2016 (the date Tesco Bank resumed
normal operations). The Authority has calculated the Step 2 figure in this case in
two stages.

(1)
Stage A. (1) Identify by reference to the seriousness of the misconduct,
any distinct periods of misconduct within the Relevant Period; (2) Weight,
having regard to the length of each such period, the seriousness of the
misconduct in each period, relative to the other periods; (3) Calculate the
resulting weighted ABR for each period; and (4) Add the separate weighted
ABRs to calculate the total weighted ABR.

(2)
Stage B. Determine the overall misconduct seriousness level and multiply
the total weighted ABR by the appropriate resulting misconduct seriousness
multiplier.

6.9.
The following paragraphs apply the methodology to the facts of this case.

6.10. The Authority divided Tesco Bank’s misconduct into three periods and weighted the

seriousness of the misconduct in each period having regard to the length of each
period, as follows:

(1)
Period 1 (1 June 2014 – 3 November 2015) covers the design and
distribution misconduct of the debit card and the failure to configure specific
authentication and fraud detection rules. The ABR during that period was
£58.5m. The weighting for that period is 15%. This equals a subtotal
weighted ABR for that period of £8.8m

(2)
Period 2 (4 November 2015 – 4 November 2016) covers the period when
Tesco Bank failed to take appropriate action to prevent the foreseeable risk
of PoS 91 fraud and is triggered by the first Visa and MasterCard warnings
about fraudulent PoS 91 transactions. The ABR during that period was
£191.4m. The weighting for that period is 40%. This equals a subtotal
weighted ABR for that period of £76.6m.

(3)
Period 3 (5 November 2016 – 9 November 2016) covers the period relating
to Tesco Bank’s response to the attack itself. The ABR during that period
was £307.6m. The weighting for that period is 45%. This equals a subtotal
weighted ABR for that period of £138.4m.

6.11. The total weighted ABR exposed to the risk of harm during the Relevant Period was

£223.74m.

6.12. In deciding the Step 2 figure, the Authority considers the seriousness of the breach

and chooses a percentage between 0% and 20%. This range is divided into five
fixed levels which represent, on a sliding scale, the seriousness of the breach; the
more serious the breach, the higher the level. For penalties imposed on firms there
are the following five levels, which the Authority considers remain appropriate in
this case:

(1)
Level 1 – 0%

(2)
Level 2 – 5%

(3)
Level 3 – 10%

(4)
Level 4 – 15%

(5)
Level 5 – 20%

6.13. In assessing the seriousness level, the Authority takes into account various factors

which reflect the impact and nature of the breach, and whether it was committed
deliberately or recklessly. DEPP 6.5A.2G (11) lists factors likely to be considered
“level 4 factors or level 5 factors”. The following factors are relevant to the
Authority’s assessment:

(1)
The breach caused a significant risk of loss to a large number of individual
customers. The attack affected 6% of Tesco Bank’s personal current
accounts (8,261 out of 131,000) such that, even if the accounts were not
actually debited, it appeared to the customers that their account balances
had been reduced.

(2)
The breach caused inconvenience and distress to a large proportion of Tesco
Bank’s debit card customers. Personal current account holders received text
messages in the early hours of the morning asking them to call Tesco Bank
about suspicious activity on their accounts. The text messages were likely
to cause distress, some customers were subsequently unable to make
payments using their debit cards and 668 unpaid direct debits on customers’
accounts were returned unpaid.

(3)
The breach revealed serious weaknesses in the operation of Tesco Bank’s
financial crime controls. The failure to take steps to address these
weaknesses left Tesco Bank’s personal current account customers
vulnerable to fraudulent PoS 91 transactions. Tesco Bank was aware that
its debit card systems were vulnerable to PoS 91 transactions but failed to
implement specific authentication and fraud detection rules to prevent such
transactions. Tesco Bank is in the business of banking and fundamental to
that business is protecting its customers from financial crime.

(4)
The breach facilitated financial crime: the attackers netted £2.26 million
from Tesco Bank’s personal customer accounts over a 48-hour period.

6.14. DEPP 6.5A.2G (12) lists factors likely to be considered “level 1, 2 or 3 factors”. Of

these, the Authority considers the following factors to be relevant:

(1)
Tesco Bank made no profits as a result of the breach.

(2)
There was no, or limited, actual or potential effect on the orderliness of, or
confidence in, markets as a result of the breach.

(3)
The breach was committed negligently. There was no lack of integrity or
good faith.

6.15. The Authority also considers that the following factors are relevant:

(1)
The attack was foreseeable. Tesco Bank received warnings about fraudulent
PoS 91 transactions and the fact that cyber criminals were using PoS 91 to
engage in fraudulent transactions. PoS 91 transactions accounted for the
majority of the fraudulent and attempted fraudulent transactions.

(2)
The attack was preventable. Having received warnings, Tesco Bank failed
to take any action to configure its debit card systems with specific
authentication and fraud detection rules. While Tesco Bank configured its
credit card systems to block PoS 91 transactions it failed to make parallel
changes to its debit card systems.

(3)
Tesco Bank could have brought the attack to a substantially earlier
conclusion.

6.16. The Authority has taken these factors into account and considers the overall

seriousness of Tesco Bank’s breaches to be level 4.

6.17. The total weighted ABR for all three periods of misconduct is £223.74m. Multiplying

the total weighted ABR of £223.74m by 15% (Level 4 seriousness), results in a
Step 2 figure of £33,562,404.

Step 3: mitigating and aggravating factors

6.18. Pursuant to DEPP 6.5A.3G, at Step 3 the Authority may increase or decrease the

amount of the financial penalty arrived at after Step 2 to take into account factors
which aggravate or mitigate the breach.

6.19. The Authority considers that there are no factors which aggravate the breach.

6.20. The Authority considers that the following factors mitigate the breach:

(1)
Tesco Bank displayed a high level of cooperation during this investigation.
It responded promptly and fully to all the Authority’s information
requirements without creating obstacles to the provision of the information
and it brought additional information to the Authority’s attention. Tesco
Bank’s senior management immediately made itself and its third-party
experts available to the FCA’s investigation team and participated in open
meetings in which it answered technical and factual questions.

(2)
Tesco Bank immediately took the initiative to commission third party reviews
following the attack. It commissioned an external report that confirmed that
no personal data was lost or stolen during the attack. It commissioned a
root cause analysis of the weaknesses that made Tesco Bank vulnerable to
the attack. It commissioned an evaluation of its financial crime controls. It
took the initiative to notify the Authority that it was commissioning these
reports and promptly provided all the reports to the Authority without
claiming privilege over the reports.

(3)
Tesco Bank reviewed the third-party reports and raised only one substantive
objection to a recommendation in the root cause analysis. It immediately
made its management response available to the Authority and senior
managers at the highest levels of the bank attended an open meeting with
the FCA and the PRA to discuss its response to the root cause analysis and
to describe the programme it was instituting to incorporate the experts’
recommendations.

(4)
Tesco Bank promptly instituted a comprehensive end-to-end review of its
financial crime controls and debit card payments systems to identify and
ameliorate the deficiencies which made it vulnerable to the attack. It has
engaged in an extensive review of those processes and, among other things,
it has: changed the way it issues new debit card and generates PANs;
enhanced its processes for monitoring and responding to threat intelligence;
improved its incident and crisis management capabilities by issuing clearer
guidance and training its staff.

(5)
Tesco Bank has made significant investments in expanding and training its
financial crime and risk teams.

(6)
Tesco Bank took the initiative to commence a comprehensive consumer
redress exercise.

(7)
Tesco Bank stopped approximately 79.79% of the fraudulent transactions.

6.21. Taking all these factors into consideration, the Authority considers that a 30%

mitigation credit is appropriate.

6.22. The Step 3 figure is therefore £23,428,571.

Step 4: adjustment for deterrence

6.23. Pursuant to DEPP 6.5A.4G if the Authority considers the figure arrived at after Step

3 is insufficient to deter the firm who committed the breach, or others, from
committing further or similar breaches, then the Authority may increase the
penalty.

6.24. The Authority considers that the Step 3 figure of £23,428,571 represents a

sufficient deterrent to Tesco Bank and others, and so has not increased the penalty
at Step 4.

6.25. The Step 4 figure is therefore £23,428,571.

Step 5: settlement discount

6.26. Pursuant to DEPP 6.5A.5G, if the Authority and the firm on whom a penalty is to be

imposed agree the amount of the financial penalty and other terms, DEPP 6.7
provides that the amount of the financial penalty which might otherwise have been
payable will be reduced to reflect the stage at which the Authority and the firm
reached agreement.

6.27. The Authority and Tesco Bank reached agreement at Stage 1 and so a 30% discount

applies to the Step 4 figure.

6.28. The Step 5 figure is therefore £16,400,000.

6.29. The Authority hereby imposes a total financial penalty of £16,400,000

(£23,428,571 before Stage 1 discount) on Tesco Bank for breaching Principle 2.

7.
PROCEDURAL MATTERS

7.1.
This Notice is given to Tesco Bank in accordance with section 390 of the Act.

7.2.
The following statutory rights are important.

Decision maker

7.3.
The decision which gave rise to the obligation to give this Notice was made by the
Settlement Decision Makers.

Manner and time for payment

7.4.
The financial penalty must be paid in full by Tesco Bank to the Authority no later
than 15 October 2018, being 14 days from the date of this Notice.

If the financial penalty is not paid

7.5.
If all or any of the financial penalty is outstanding on 15 October 2018, the Authority
may recover the outstanding amount as a debt owed by Tesco Bank and due to the
Authority.

7.6.
Sections 391(4), 391(6) and 391(7) of the Act apply to the publication of
information about the matter to which this notice relates. Under those provisions,
the Authority must publish such information about the matter to which this notice
relates as the Authority considers appropriate. The information may be published
in such manner as the Authority considers appropriate. However, the Authority
may not publish information if such publication would, in the opinion of the
Authority, be unfair to your or prejudicial to the interests of consumers or
detrimental to the stability of the UK financial system.

7.7.
The Authority intends to publish such information about the matter to which this
Final Notice relates as it considers appropriate.

Authority contacts

7.8.
For more information concerning this matter generally, contact Maria Gouvas at the
Authority (020 7066 3552).

Bill Sillett

Head of Department

Financial Conduct Authority, Enforcement and Market Oversight Division


ANNEX A

RELEVANT STATUTORY AND REGULATORY PROVISIONS

1.
RELEVANT STATUTORY PROVISIONS

1.1
The Authority has the power to impose an appropriate penalty on an authorised
person if the Authority considers that an authorised person has contravened a
relevant requirement (section 206 of the Act).

1.2
In discharging its general functions, the Authority must, so far as reasonably
possible, act in a way which is compatible with its strategic objective and advances
one or more of its operational objectives (section 1B (1) of the Act). The Authority’s
strategic objective is ensuring that the relevant markets function well (section 1B
(2) of the Act). The Authority has three operational objectives (section 1B (3) of
the Act).

1.3
Two of the Authority’s operational objectives, the consumer protection objective
(section 1C of the Act) and the integrity objective (section 1D of the Act), are
relevant to this matter.


2.
RELEVANT REGULATORY PROVISIONS

2.1
In exercising its powers to impose a financial penalty, the Authority has had regard
to the relevant regulatory provisions published in the Authority’s Handbook. The
Handbook provisions relevant in this matter are the Principles, the Decision,
Procedures and Penalties Manual (“DEPP”) and the Enforcement Guide (“EG”).

2.2
The Principles are a general statement of the fundamental obligations of firms
under the regulatory system. They derive their authority from the Authority’s rule-
making powers set out in the Act. The relevant Principle in this matter is Principle
2:

“A firm must conduct its business with due skill, care and diligence”.

2.3
DEPP sets out the Authority’s policy for imposing a financial penalty. For conduct
occurring on or after 6 March 2010, the Authority applies a five-step framework to
determine the appropriate level of financial penalty. DEPP 6.5A sets out the details
of the five-step framework that applies to financial penalties imposed on firms. The
conduct that is the subject matter of this action took place after 6 March 2010.

2.4
EG sets out the Authority’s approach to taking disciplinary action. The Authority’s
approach to financial penalties is set out in Chapter 7 of the Enforcement Guide.