On 1 December 2017, the consultation period closed on HM Treasury's latest step towards transforming the way in which cheques are cleared. In its bid to ensure UK payment systems remain effective, efficient, innovative and aligned to the needs of end users, HM Treasury has supported the industry-led initiative to introduce a new image-clearing system (ICS) for cheques. This article focuses on the two legislative proposals consulted upon in late 2017.
Cheque usage may appear to be in decline, but 477 million cheques were used in the UK in 2016, representing a value of £551 billion. The new ICS for cheques sees the relevant banks digitally exchanging images of cheques, as opposed to physically moving paper cheques around the country – taking the process from up to six days to within one day. ICS means that if a customer pays in a cheque on a weekday, the funds will be available for withdrawal by 23:59 the next weekday. Many banks and building societies will likely allow customers to access funds sooner. ICS was rolled out to certain banks from 30 October 2017, and it is expected that, at some point in the second half of 2018, all banks will use the system.
The Treasury consultation
HM Treasury's consultation proposed secondary legislation to support the introduction of ICS, and followed amendments made by the Small Business, Enterprise and Employment Act 2015 to the Bills of Exchange Act 1882 (the 1882 Act). The 2015 amendments are included in Annex A to the consultation. These amendments included two provisions that formed the basis of the secondary legislation recently consulted upon. These proposals form Annex B of the consultation, which provides the wording of the Electronic Presentment of Instruments (Evidence of Payment and Compensation for Loss) Regulations 2018 (the Regulations). Subject to consultation responses and Parliament approval, the Regulations are expected to apply from April 2018. The two proposals will now be discussed in turn.
Cheques as evidence of payment
The Cheques Act 1957 had provided that the payer of a cheque can request a paid cheque (stamped "paid") to be returned by their bank, which could then be used as evidence of the payer's payment. Under the ICS, however, the payer's bank receives a digital image of the cheque, as opposed to a physical paper cheque.
HM Treasury's legislative proposal specifies that a payer can request from their bank a copy of the cheque – that is, images of its front and back, together with additional information – which will constitute evidence of payment. The 'additional information' must include:
- Confirmation of the banker's decision, and the date and time at which the decision was made and submitted to the payment system (if the decision was automated, the date and time of that automated payment instruction)
- Value of the payment made to the banker authorised to collect payment
- Identifiers of debit for ICS and collecting bank
- Sort code and account numbers of payer and payee
- ICS confirmation that payment was made and information provided.
Another provision consulted upon is the price of providing a copy of the cheque and the additional information. HM Treasury has proposed that the first copy of a paid cheque should be free of charge, and that the fee charged for the provision of subsequent copies should not exceed the cost of producing the copy.
There is no time limit on when a payer may request a copy of the cheque, but given a copy of the cheque and 'additional information' can be stored electronically there should be no practical limits on how long a payer's bank can store the information. Such storage of information would of course have to be in line with relevant data protection legislation.
Compensation for loss
The second issue addressed by the proposed secondary legislation is the situation in which a customer incurs a loss as a result of electronic presentment or purported electronic presentment of a cheque. Currently, the industry (led by the Cheque and Credit Clearing Company) has developed a convention whereby the paying bank will compensate their customer for the loss.
HM Treasury has identified the risk that, under the new ICS system, payers incurring a loss may not be compensated. This concern partly arises because under the ICS the payer bank will not receive the physical cheque and may therefore be reluctant to compensate the payer's loss. Government is content for the industry-led approach to continue, allowing industry agreements to remain the first port of call in determining principal liability for compensation among the paying and payee banks, but has proposed to implement a legislative safety net.
The amendments made to the 1882 Act include a provision for HM Treasury to make regulations requiring the payee's bank to compensate any person for losses incurred in connection with the electronic presentment of a cheque. Under the ICS, the payee's bank is the only bank that may receive the original cheque – and it is for this reason that the government doesn’t have the power to require any bank (other than the payee's bank) to compensate for loss.
The safety net in the Regulations would require the payee's bank to compensate either the payer or the payer's bank for a direct loss suffered in connection with the presentment of a cheque under the new ICS. Provided the payer or the payer's bank has not been complicit in fraud, or acted in a grossly negligent way, he or she will be eligible for compensation. In so doing, HM Treasury's proposals ensure that the customer is not left out of pocket on presentment of a cheque.
In the draft text to the proposed Regulations, the payer's bank is included as a possible claimant for compensation. Government suggests that, in so doing, the payer's bank continues to be incentivised for compensating its own customers promptly.
As the Regulations do not prohibit the payee bank from seeking to recover compensation from another party after compensating a claimant, there is no barrier to the industry agreeing other arrangements regarding the sharing of losses arising from the presentment of cheques under the ICS.
The Regulations do require a claim to the payee bank to include all information relating to the claim necessary for it to assess whether the conditions set out in regulation 4 of the Regulations have been met. Given the nature of the criteria in regulation 4(2), payers may initially struggle to easily provide the information required by the payee bank. The industry will need to consider this issue and the ways in which they can help payers provide the required information when making a claim.
HM Treasury was keen to note in the consultation that "sole traders, other micro businesses and small businesses … make over a fifth of their outgoing payments" with cheques. While cheque use is important for these business its use continues to decline year on year as a percentage of the total value of payments. To try and slow the rate of decline in the use of cheques it is critical that the industry deliver on the aim of ICS legislation (both primary and secondary) to speed up the processing of cheque payments and ensure the end user is no worse off following ICS' introduction.
With the introduction of payment initiation services through the implementation of PSD2, the attractiveness of cheques may further erode. Particularly if an initiated payment can be made in near real time using Faster Payments. With ICS legislation expected to apply from April 2018 and PSD2 implemented on 13 January 2018, 2018 promises to be an interesting year for payment services. Small businesses in particular may now find themselves better equipped to more efficiently process payments.
As has been the case since 30 October 2017, ICS will continue to operate in tandem with the existing paper-based system for cheques. It may only be a matter of months, however, before all banks and building societies have made the switch to ICS.
This article was first published in Payments & FinTech Lawyer.