Independence from APACS
The governance structure established as a result of the Child Report remained in place largely unchanged for 15 years until the Cruickshank Report, ‘Competition in UK Banking’, was published in March 2000.
The report included a number of criticisms about the UK money transmission industry, many of which were re-iterated in HM Treasury's subsequent consultation document in the following year. Cruickshank concluded from his review of the markets and network features that UK payment systems were failing in terms of delivering price transparency, good governance, non-discriminatory access and efficient wholesale pricing. The Cruickshank Report and the public consultation by HM Treasury both recommended the establishment of a payment systems’ regulator.
In response to the report and the public consultation, APACS reviewed the link between membership of APACS and ownership of the principal clearing systems. It was decided that it should no longer be a requirement that members of the clearing companies should be members of APACS, that the clearing companies should be in complete control of admission to their clearings and that their eligibility criteria should be published.
So, in September 2002, the C&CCC became fully independent of APACS, taking control of its admissions process and publishing its eligibility criteria.
Moving the London exchange centre to the Midlands
The Lombard Street Exchange Centre (the old Bankers’ Clearing House) had been built prior to the advent of motorised vehicles so, due to size restrictions, was only really accessible by special electric vans that the banks had commissioned in the 1960s. When the banks started to move their processing centres out of London, an exchange centre was sought that could take deliveries from larger, fuel driven vans (though the final trip by an electric van was made on 3 February 1995).
The Lombard Street Exchange Centre closed in 1994. From 1994 until 2003, English and Welsh items were exchanged at the premises of the National Westminster Bank in Goodman’s Fields in the East End of London.
In 2003 the London exchange centre was moved again, since a depot that could take lorries heavier than three tons was needed. So, for the first time in its history and after more than 230 years, the London exchange centre moved permanently outside London, to the Midlands. Those members whose processing centres were now based in the Midlands avoided the need for the time-consuming journey by road to London. The exchange was re-named the English Exchange.
Settlement agreements and liquidity funding arrangement
The cheque and credit clearing systems are deferred multilateral net settlement systems. This means there is a significant delay between the exchange of the cheques and credits for payment and the actual settlement of those payments, which takes place on the day after exchange. In such a system, if one of the members is unable to settle, the consequences for the other members are potentially complex and create unexpected credit or liquidity risks.
Between 2003 and 2005 the C&CCC created a legal framework, including liquidity funding and collateralisation arrangements that would enable settlement to complete in a variety of bank financial failure scenarios. The aim is to ensure that the clearing systems continue to operate with just the surviving banks if a bank were to collapse.
Introduction of the 2-4-6 cheque clearing timescales: certainty for the first time!
In an electronic age, people have always asked why it still takes three days to clear a cheque. The fact is, cheques still have to be returned physically to the payer’s bank as the current law requires it. The payer’s bank has the right to “see” and examine the physical cheque for fraud prevention and detection purposes. This right is enshrined in the Bills of Exchange Act 1882, the most important piece of legislation that governs cheques, examination of the physical cheque being the only way to detect fraud at the time the 1882 Act was drawn up. In addition, many businesses and consumers actually take advantage of the cash flow benefits of the three-day cycle. These and other issues were addressed by the Cheques Working Group, which was set up in October 2005 by the OFT-led Payment Systems Task Force (which has since been wound up). The aim of the group was to consider what improvements, if any, were needed to the cheque and credit clearing systems across the UK. The recommendations of the working group were published in the Cheques Working Group Report in November 2006.
For the report, the Cheques Working Group conducted research to determine consumer and small business use of, and attitudes towards, cheques. The main findings were that customers did not understand the cheque clearing cycle and there was a demand for greater transparency and certainty of payment. There was, however, no business case for speeding up the cycle at that time. The conclusions drawn from the research resulted in recommendations for the settlement members of both the C&CCC and the Belfast Bankers’ Clearing Company to make changes to the clearing cycle by the end of November 2007, and for all subscribers to the then Banking Code to adopt these changes when the new Code came into force in 2008.
The changes, implemented at the end of November 2007, are known as the 2-4-6 and 2-6-6 cheque clearing timescales. The changes have increased clarity and provided certainty for all elements of the cheque clearing process for customers paying in sterling cheques to a UK current or basic bank account (2-4-6), or UK savings account (2-6-6). The timescales do not apply to foreign currency cheques.
The changes mean that customers start earning interest on money paid into their current, basic or savings accounts no later than two working days after paying in a cheque. After no later than four working days the money becomes available for withdrawal (six working days for savings accounts).
The changes also mean that for the first time customers can be sure that, at the end of six working days after paying in a cheque, the money is theirs. The beneficiary customer is protected from loss if the cheque subsequently bounces, and the money cannot be reclaimed without their consent, unless they are a knowing party to fraud. This is known as “certainty of fate” and the UK is the only country in the world that guarantees the cheque will not bounce after a known timescale.
The 2-4-6 timescales are only the maximum timescales – individual banks and building societies may and do compete on when they pay interest or allow funds from paid-in cheques to be withdrawn by offering these earlier than two and four working days respectively.
Although providing guaranteed maximum clearing timescales was ground-breaking in the world of cheque payments, it is not easy to explain – “certainty of fate” is unique to cheques as is “cleared for value” and “cleared for withdrawal”. To help customers understand the timescales, the Cheque and Credit Clearing Company produced a video to show the different stages involved in clearing a cheque. This was before the days of YouTube so to view this video, click here.
However, our market research, carried out every year since 2008, revealed that that very few people understood the concept!
To achieve the 2-4-6 timescales, the system for processing unpaid cheques had to be streamlined so that the ‘pay/no pay’ decision is always made on the day following exchange. Instead of relying on the postal system, the banks use a dedicated courier service so that notification of an unpaid is always received by the collecting bank on the day after the ‘pay/no pay’ decision is made.
The courier service is provided by a third party supplier to settlement banks in Britain and Northern Ireland, and is managed by the C&CCC. This was the first time that the C&CCC had worked with the Belfast Bankers’ Clearing Company to implement a new service for banks across the UK and it helped ensure that the clearing banks could deliver the new clearing timescales.
The humble cheque’s Darkest Hour
The Payments Council was set up by the payments industry in March 2007 to ensure that UK payment systems and services met the needs of payment service providers, users and the wider economy.
Its first task was to develop a National Payments Plan after an extensive public consultation process.
Launched in 2008, the Plan was a programme of activity for the development of co-operative payment services in the UK.
In the original Plan, the Payments Council set a target date to close the central cheque processing system in 2018, but only if stringent criteria were met. A decision would only have been taken in 2016 to proceed with closure if alternatives to cheques were in place, were acceptable to customers and had been widely adopted by all. Early in the programme of work, the Payments Council identified that a paper-based option would be a necessary alternative to cheques. However, the Council concluded in July 2011 that this was no longer the best option and retaining the cheque for as long as customers needed them was a better approach.
In June 2015, Payments UK, a new trade association, succeeded the Payments Council.
Cheques would remain for as long as customers wanted to use them – the future was assured but that was by no means the end of the story.