The Financial Services Authority (FSA) could order all regulated financial companies to immediately inform customers of data security breaches, it has said.
It has that power, which would largely negate the need for a law ordering notification.
Some privacy experts believe that a law ordering notification would make companies more careful and more accountable for the use of personal information, but the financial industry has resisted the calls for legislation.
The FSA has told OUT-LAW that it backs notification in almost all cases, but that a blanket rule was not the best option. It said it does have the power to create such a rule, though, which would bind the UK's entire financial services industry to notification.
The news comes as Nationwide Building Society, the UK's largest, faces an almost £1m fine for lax security procedures and controls which led to the exposure of the personal details of an unknown number of customers when a Nationwide laptop was stolen.
Both the FSA and Nationwide refused to disclose whether or not it ordered Nationwide to inform customers of the security breach. "I don't want to get in to the hows or the whens of it," said FSA spokesman Patrick Humphries.
The FSA spokesman did concede, though, that it had a role in the disclosure. "We did think very carefully and talked to other bodies like the police and the Information Commissioner's Office about when and how Nationwide should communicate with its customers," he said.
A Nationwide spokeswoman would not say whether or not it had been told or advised to inform customers by the FSA, the Information Commissioner, or any other body. All the spokeswoman would say when asked that question was: "We advised the police, the Information Commissioner and the FSA of the theft of the laptop and have been co-operating with them since".
Though the employee whose laptop was stolen from his home last year told the company about the incident straight away, it is reported that he did not inform Nationwide that customer data was on the machine until after a three week holiday.
Nationwide did eventually alert all its customers by letter that the breach had occurred, it said. But the delay worries some information security experts, who say that those whose data has been compromised should know straight away.
The scandal could increase calls for the UK to adopt a California-style requirement that organisations publicise serious data breaches. There is currently no demand that organisations admit breaches.
"The FSA's actions raise the issue of whether the UK should import the Californian style security breach requirement," said Dr Chris Pounder, a privacy expert at Pinsent Masons, the law firm behind OUT-LAW.COM.
"In an environment where the government is warning about ID theft it seems sensible to alert data subjects to the fact that their identity has been exposed," said Pounder.
The Information Commissioner's Office (ICO), which is responsible for monitoring compliance with the Data Protection Act, has stopped short of calling for security alerts, but assistant commissioner Phil Jones told Channel 4 News this week that his office thought such a law would be valuable.
"There certainly is quite a considerable amount of pressure to follow what I understand is the model in the US, which is to introduce some form of formal mandated reporting," he told Channel 4 News. "Certainly we can see a value in this. I think what is the most important thing, before reporting an incident to anybody is to make an immediate assessment of what's gone wrong and to take immediate action to seek to minimise the further risk."
The FSA's Humphries said though the FSA had no firm position on the matter, it thought that a law applicable to all situations may not be appropriate. He said there could be some situations where publicising the breach would, in fact, make it worse, and each case should be assessed on its own merits.
Humphries also said the £980,000 fine was not just in relation to one single laptop incident. "We went in and did an investigation and found wider failings, and took action on the security systems and controls, which we found were not up to scratch," he said.
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FSA's final notice to Nationwide (9 page/94KB PDF)