Consultation outcome

Legislation to support cheque imaging: consultation

Updated 30 April 2018

1. Introduction

1.1 The subject of this consultation

This consultation invites views on proposals to make provision for two measures in secondary legislation. The aim of the proposed legislation is to ensure that the Image Clearing System (ICS) for cheques has no detrimental impact on the existing position of cheque users.

The proposed legislation on which we are seeking views would provide:

• that a copy of a paid cheque (or other paper instrument)^{[footnote 1]} be provided to the payer upon his or her request, and that the copy can be used as evidence of payment
• that if a customer incurs a loss in connection with the presentment of a cheque under the ICS, and has not received compensation, the payee’s bank must compensate the customer for this loss

1.2 Who should read this

This consultation should be read by those with an interest in cheques and the operation of the cheque payment system. This includes banks, building societies and other payment service providers, businesses, trade bodies, consumer groups and other interested parties.

1.3 Background

Payment systems sit at the heart of the economy. They allow money to flow among and between households and businesses. The government is committed to ensuring that the UK’s payment systems are effective, efficient, and innovative, and that they meet the needs of end users. Cheques continue to form a vital part of the British payments landscape. In 2016, 477 million cheques were used for payments and to acquire cash across the UK with a total value of £551 billion. Over nine in ten businesses and other organisations continue to use them. Cheques are used by sole traders, other micro businesses and small businesses to make over a fifth of their outgoing payments. For many smaller charities and other voluntary organisations, cheques are the primary method of payment, and they continue to be an important payment method to many members of the public.

In 2015, HM Treasury introduced legislative measures in the Small Business, Enterprise and Employment Act 2015, amending the Bills of Exchange Act 1882, to allow UK banks and building societies to introduce cheque imaging, an innovation that aims to cut down cheque clearing times from a possible six days to one day by sending a digital image of the cheque for clearing, rather than the paper cheque itself.^{[footnote 2]} This followed a consultation on the proposed legislation in March 2014.^{[footnote 3]}

The primary legislation included two provisions under which the government proposes to make the regulations consulted on here.

The first concerns the use of cheques as evidence of payment. Under the existing clearing system, the payer of a cheque could request that the paid cheque be returned to them by the paying bank. Under the Cheques Act 1957 this could be used by the customer as evidence of payment. To ensure that this right remains available under the new system the primary legislation enables the Government to introduce, through secondary legislation, a requirement that a copy of the paid cheque be provided, where requested, to the payer of the cheque by the paying banker along with relevant information.

The second relevant provision concerns compensation. To ensure that customers are not left out of pocket as a result of a loss incurred in connection with the presentment of a cheque under the new ICS, the primary legislation allows for the Government to require the payee’s bank to compensate a person who incurs such a loss. This legislation is only intended to act as a ‘safety net.’ The scheme rules set by Cheque and Credit Clearing Company, the company that processes cheques in Great Britain, will remain the principal indicator of which party should compensate a customer.

This consultation document sets out how the government proposes to exercise its powers under these provisions and invites responses to its proposed approach.

1.4 Timeline for secondary legislation to support ICS

1 December 2017	Consultation closes
February 2018	Government response document published
February 2018	Legislation to be laid in Parliament
April 2018	Legislation to apply

2. Secondary legislation on the use of cheques as evidence of payment

Section 3 of the Cheques Act 1957 provides that a cheque, or certified copy of a cheque, which appears to have been paid by the banker^{[footnote 4]} on whom it was drawn, can be used as evidence of payment to the payee. The effect of this is the payer of a cheque can request the paid cheque, stamped ‘paid’, to be returned to them by their bank. This can then be used by the payer as evidence of payment.

Under the new ICS, the payer’s bank will no longer receive the original cheque from the payee’s bank; instead, the payer’s bank will receive a digital image of the cheque from the payee’s bank.

To allow payers of cheques to continue to receive evidence of payment under ICS, the primary legislation allows the Treasury to require that a copy of the paid cheque be provided to the payer by their banker, if requested.

Government therefore proposes to legislate to specify that the payer can request from their Bank a copy of a cheque, which under the legislation, will have to be accompanied by some details. The image of the cheque (front and back) together with the ‘additional information’ will amount to evidence of payment.

Government proposes that the ‘additional information’ should 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 debit
• Image Clearing System (ICS) item identifier of debit
• the collecting bank’s item identifier of debit
• sort code and account number of the payer
• sort code and account number of the payee
• confirmation by ICS that payment was made and information provided in accordance with the above

We also propose that the first copy of the paid cheque with the accompanying additional information should be provided free of charge. A charge for any subsequent copies should not exceed the cost of producing the copy.

Draft regulations are included in Annex B.

Question 1: Do you agree with the government’s proposed approach to legislating to require banks to provide the image of the cheque (front and back) together with the ‘additional information’ under the Image Clearing System?

3. Secondary legislation on compensation

Government believes that users of cheques should not be left out of pocket as a result of a loss incurred in connection with the presentment of a cheque under the new ICS. Under the existing clearing system, the paying bank typically compensates customers for a loss, though there is no legislation stipulating that they must do so. Rules for compensation in cases of fraud or error (‘adjustments’) are also set out by Cheque and Credit Clearing Company.

Government believes that this industry-led approach works well, but is concerned that the new system could introduce the risk that a payer of a cheque who incurs a loss may not be compensated. This is partly because under ICS the payer’s bank will no longer receive the original cheque. Government therefore believes that legislation is necessary to protect the customer. Government views the proposed legislation on compensation as a safety net to ensure that a customer does not suffer a loss that is not remedied; industry agreements should remain the first indicator of which party – the paying bank, the payee’s bank/beneficiary bank, or the collecting bank (if different to the payee’s bank) – compensates a customer. Furthermore, the legislation does not preclude banks from seeking to recover from another party after compensating a customer.

The primary legislation enabling cheque imaging includes a provision for the Treasury to require the payee’s bank (the ‘beneficiary bank’) to compensate another party for a loss that party incurs in connection with the electronic presentment of a cheque.^{[footnote 5]} Government does not have the power to require any bank other than the payee’s bank to compensate for a loss. This is because under ICS the payee’s bank is the only bank that will be able to receive the original cheque.

Government therefore proposes to put in place a ‘safety net’ to require that the payee’s bank compensate a customer, who has not been complicit in fraud or acted in a grossly negligent way, for a direct loss they have incurred in connection with the presentment of a cheque under the new ICS. To ensure that the payer’s bank continues to be incentivised to compensate their own customers promptly we propose to include the bank that paid the instrument (the payer’s bank) as a possible claimant.

Specifying that the payee’s bank must provide compensation in the event of a loss incurred in connection with the presentment of a cheque under the new ICS ensures that a customer is not left out of pocket.

Government’s draft legislation to ensure that a customer is compensated for a loss incurred in connection with the presentment of a cheque under the new ICS is included in Annex B to this consultation document.

Question 2: Do you agree with the government’s proposed approach to legislate to ensure that a customer is not left out of pocket due to a loss incurred in connection with the presentment of a cheque under the new Image Clearing System?

4. Consultation questions and how to respond

Question 1: Do you agree with the government’s proposed approach to legislating to require banks to provide the image of the cheque (front and back) together with the ‘additional information’ under the Image Clearing System?

Question 2: Do you agree with the government’s proposed approach to legislate to ensure that a customer is not left out of pocket due to a loss incurred in connection with the presentment of a cheque under the new Image Clearing System?

4.1 How to respond

The Treasury invites responses on the specific questions raised. The questions can be found throughout the document and are listed in full above.

This consultation will run from 3 November to 1 December.

Please send responses to:

Cheque Imaging Consultation
Banking and Credit Team
Floor 1, Red
HM Treasury
1 Horse Guards Road
London
SW1A 2HQ
Email: chequeimaging@hmtreasury.gsi.gov.uk

4.2 Confidentiality

Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the Freedom of Information Act 2000 (FOIA).

If you want the information that you provide to be treated as confidential, please be aware that, under the FOIA, there is a statutory Code of Practice with which public authorities must comply and which deals, among other things, with obligations of confidentiality. In view of this it would be helpful if you could explain to us why you regard the information you have provided as confidential. If we receive a request for disclosure of the information we will take full account of your explanation, but we cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system will not, of itself, be regarded as binding.

1. For this consultation document, references to ‘cheque’ include other paper instruments (such as bankers’ drafts, postal orders, government payable orders, warrants, travellers’ cheques and bank giro credits). ↩

2. Small Business, Enterprise and Employment Act 2015 ↩

3. Speeding up cheque payments: summary of responses ↩

4. As defined in s2 of the Bills or Exchange Act 1882, “Banker” includes a body of persons whether incorporated or not who carry on the business of banking. ↩

5. See Annex A: Bills of Exchange Act 1882: 89E(1) ‘The Treasury may by regulations make provision for the responsible banker to compensate any person for any loss of a kind specified by the regulations which that person incurs in connection with electronic presentment or purported electronic presentment of an instrument.’ ↩