In a preview of research to be released later this week, the UK’s Financial Services Authority says that it will encourage banks to engage consumers in tackling online fraud.

The FSA’s Financial Risk Outlook 2006, to be published on Wednesday, will encourage banks to further engage consumers in their fight to combat the rise in online banking fraud. In a chapter on financial crime the FSA will outline the key findings of consumer research undertaken to gauge confidence in Internet banking.

The research found that consumer confidence in Internet banking is fragile. Half of active internet users said they were ‘extremely’ or ‘very’ concerned about the potential fraud risk of making an online transaction.

Consumers who conduct their banking online are taking steps to protect themselves against fraud, by installing security software on their PC, but over a quarter did not know when they last updated their software or updated it infrequently.

According to the UK Payment Association, fraud losses through Internet banking were £14.5 million ($29.54 million) in the six months to June 2005. Although this is relatively low, losses have more than trebled since the same period in 2004 (£4 million).

The FSA’s research found that if banks were to tackle these losses by shifting the liability fully towards the consumer, more than three quarters (77%) of users say they would abandon Internet banking. Nearly all users (95%) surveyed believe that at least some security responsibility should lie with the bank while 45% believe banks should take sole responsibility.

“If consumers were asked to foot the bill for Internet banking fraud losses, our research shows that they would stop using the tool. Most consumers recognize they have some responsibility for security but they are not necessarily following this obligation through,” said Philip Robinson, Financial Crime Sector Leader at the FSA. “To tackle the losses associated with fraud, banks should continue to drive security and this must include educating consumers on the importance of protecting themselves.”

“We recognize that many banks are already taking steps to engage consumers. But banks need to look carefully at consumer attitudes and whether their initiatives are effective in maintaining confidence,” he added.

New methods tested by banks to improve internet banking security include two-factor authentication where users are required to enter two means of identification, one which is typically digits from a physical token and the other is typically something memorized.

Other findings from the consumer research include: 5% of online bankers have no security software installed on their PC, 59% of Internet users believe it is possible that someone could access an online account and commit fraud without the account holder having supplied their log-in details, 45-54 year olds are most concerned (54%) about online fraud while 15-17 year olds are least concerned (38%).

The research was conducted by NMG Financial Services Consulting/IPSOS on behalf of the FSA in October/November 2005. A sample of 1508 respondents who had used the internet within the past 6 months and who held a current account completed the survey.