Cheques – end of an era?

The UK Payments Council decided in a meeting today, 16 December, to set a target end date of 31 October 2018 to close the central cheque clearing in Great Britain and Northern Ireland.  Because there is concern that viable alternatives to cheques have not yet been identified, a major review of the decison will be held in 2016.  Consultation on cheques has been conducted over the past 18 months.  Abolishing cheques would present a particular challenge for not only sole traders and small businesses but also those customers of banks who conduct business but whose sole purpose is not commerce:  e.g., schools, clubs and charities.  Much work has to go into finding alternatives that are practical and easy to use by payers to such entities.  There are more details on the UK Payments Council site.

From a legal point of view, I will miss cheques.  They have a long and, if you will excuse the pun, an honoured history.   Although not as long and romantic a history as bills of exchange, their close cousins – romantic? think of The Merchant of Venice.  A plastic card or a computer screen isn’t as beautiful as those early examples of cheques in copperplate handwriting of instructions to goldsmiths “To Pay”, embellished with flourishes and curlicues.  It will be interesting to see what alternatives other than that other rare breed, cash, are proposed by the UK Payments Council to enable me to pay my plumber (how many tradesman feel happy about giving out their bank account numbers?), the ladies who run our after-school club or the mother who out of the goodness of her heart organises a school trip for the whole class to the Christmas pantomime.

Bank Law Fossil

Some recent issues

At a recent “round table”, I gave an overview of legal developments of interest to bank lawyers. Here is a summary:

Regulatory Reform

Is a perfect maelstrom of activity for obvious reasons, as banks are being handed birch twigs to beat themselves penitentially for not counting the pennies. Events have been moving faster than I can blog, and now in the FT we have talk of a turf war between the Bank of England and the FSA cuminating today in the threat of yet another Banking Act.  A few weeks ago, the House of Lords put the boot into the FSA by recommending reform of the tripartite system of FSA/BoE/HMT regulation. They want to reverse history and return supervisory powers to the BoE. You could feel sorry for the FSA. The BBA threw themselves into the job of replying to the FSA consultation “A regulatory response to the global banking crisis” and asked for much more thought to be put into the proposals. The BBA challenge the assumption that any additional regulatory requirement can be justified because “it can’t cost as much as the crisis”.  The FSA propose to take on enforcement of what used to be the BBA’s voluntary Banking Code in November, to levy fines on errant banks. And they have set out the final rules of BCOBS affecting retail banking for consumers and small businesses and requiring banks to help consumers to switch accounts promptly and efficiently.  On top of all this, the OFT are consulting on its Financial Services Strategy, in order to promote fairness and responsibility in the credit industry and its customers. The FSA, not being very busy, have also published a paper on Consumer Responsibility: consumers and lenders are expected to show responsibility, in lending, borrowing, mortgaging, using credit cards and when discussing the EU Responsible Lending Directive.  This hasn’t gone down well with consumer groups.

Registration of company charges

You will soon need to dust off your old files because the consultation is going to start up again in 2010. We will revisit the brave new world of electronic registration and start talking knowledgeably about New Zealand and Canadian personal property security law again as if we were all old hands.

Banking Act 2009

Then there is the Banking Act 2009 and its importance to financial stability. The continuity of banking services is now enshrined in law with a special insolvency position for banks: the special resolution regime. The Safeguards Order has posed some difficulty with its carve outs to the safeguards creating a lack of legal certainty that affected unqualified legal opinions for set off and netting arrangements. This is the “one bad apple” problem – if a failing bank undergoes a partial transfer of assets, the government should be able (to continue the fruity analogy) to cherry-pick assets from a netting arrangement with the Bank and avoid the bad apple. The concern was that the Safeguards Order as drafted would have lead to whole ISDA Master Agreements being taken down in a partial transfer of assets. The drafting problem was where assets in the netting arrangement were to be “solely” “financial instruments” – as defined in MIFID, which automatically excluded forwards, commodity derivatives, life insurance derivatives, spot and forward FX. Despite a few Parliamentary distractions recently, HMT laid a revised draft before Parliament for approval and the drafting error has been rectified. Considering the Order for approval under the affirmative resolution procedure will make a welcome relief from choosing a floating duck house that no duck wants to live in.

Payment Services Directive

The Payment Services Regulations, implementing the PSD nationally to harmonise payment systems across the EU will be thoroughly embedded in banks’ activities by now. The PSD will be implemented in November 2009, the FSA handbook will be amended and banks are well up on changing their payment systems to comply. Perimeter guidance has been issued by the FSA to help banks decide if their activities fall in the scope of the PSD.

Reform of OTC derivatives regulation

And finally, the US have proposed regulatory reform of OTC derivatives to prevent activities in the OTC derivatives markets from posing risk to the financial system; to promote the efficiency and transparency of the OTC derivatives markets; to prevent market manipulation, fraud, and other market abuses; and to ensure that OTC derivatives are not marketed inappropriately to unsophisticated parties.  Sonnenschein’s have a good note on it.

Do banks understand the clearing cycle?

The Banking Code Standards Board have published the results of their mystery shopping to see how many banks understood the impact of the 2-4-6 cheque clearing process.  They found there is confusion among bank staff.  They looked for the ability of bank staff to provide clear and accurate information about cheque clearing times.  They also checked whether banks had changed their terms and conditions to bring them into line with the new clearing rules.  In November 2007, the Cheque and Credit Clearing Company standardised maximum cheque clearing times.  This was to help customers know how quickly they could benefit from interest on cheques paid in, how soon underlying funds could be withdrawn and when they could be certain a cheque would not be returned unpaid.  Only one bank provided correct information on all the tests.  At the other end of the scale, a bank gave wrong answers in nearly 60% of cases.  The main area for confusion was calculating the day on which a cheque would not be returned unpaid (certainly of fate).  Some staff gave a description of the clearing cycle before the 2-4-6 changes were implemented.  One bank quoted an 8 day clearing cycle.  Two banks had not advised customers of the changes to the terms and conditions on their accounts.

Bank Law Blogger posted on 2-4-6 in November 2007.

European payment systems should comply with data protection law

The European Data Protection Supervisor has issued his opinion on the role of the European Central Bank in the SWIFT case.  There is a bit of a history behind this: the SWIFT case started in June 2006 when press coverage revealed a secret US terrorist financing tracking system. This raised issues of compliance with European data protection legislation, and complaints were lodged with data protection authorities all over Europe.Have a look at this here, for some background.

The Opinion ought to be available here, but isn’t yet.  Keep looking.  ECB’s position in the context of the payment system is threefold, being an overseer, a user, and a policy maker. When deciding to use SWIFT’s services in its own payment operations, the ECB was placed in the position of a joint controller. As such, it is co-responsible for ensuring full compliance with data protection rules. This includes ensuring respect for the purpose limitation principle, information to data subjects, and adequate guarantees when personal data are transferred to third countries.

Regulation on information on the payer accompanying transfers of funds: publication in Official Journal

On 8 December 2006, Regulation No 1781/2006 on information on the payer accompanying transfers of funds was published in the Official Journal.  The regulation will come into force on 1 January 2007.

The Regulation applies to electronic transfers of funds which are sent or received by a payment service provider (PSP), that is, a natural or legal person whose business includes the provision of transfer of funds services. The Regulation does not apply to transfers of funds that represent a low risk of money laundering or terrorist financing (for example, provided that certain conditions are met, transfers using credit and debit cards). The purpose of the Regulation is to help prevent, investigate and detect money laundering and terrorist financing. The Regulation obliges the PSP of the payer to ensure that electronic transfers of funds are accompanied by accurate and meaningful information about the payer (at most, the payer’s name, address and account number). The Regulation also imposes obligations on the PSP of the payee, in particular, in relation to verifying that the required information has been sent (where such information is missing or incomplete, the PSP must either ask for the information or reject the transfer). Provisions regarding intermediary PSPs are also included. All PSPs are obliged to keep records of information on the payer for five years and to respond to requests for this information from competent authorities.  Although penalties for non-compliance will not be applied until December 2007, it is important to realise that non-compliance could run the risk of transfers being rejected.