Motion to Approve
That the draft Regulations laid before the House on 30 April be approved.
My Lords, payment systems sit at the heart of our economy. They allow money to flow between households and businesses, allowing the prompt and proper exchange of goods and services. The Government are therefore committed to ensuring that the United Kingdom’s payment systems are efficient and meet the needs of end-users, taking advantage of technological developments as they arise.
Cheques continue to form a vital part of the British payments landscape. While there is no denying that there has been a decline in their use over the years, cheques are still important for many smaller charities, voluntary organisations and those members of our society who are often the most vulnerable. In the first quarter of 2018, more than 65 million cheques were cleared, with a value of over £80 billion. That is an average of 1 million cheques cleared per working day.
Before we discuss the new legislation I am presenting to the House today, I shall briefly explain how the current cheque clearing system works. Under the current model, cheques deposited into a bank or building society are transported to their associated processing centre where the essential details are read. Afterwards they are transported to an exchange centre, where the cheques are physically passed to the bank of the customer who originally drew them. Finally, the cheques are taken to the relevant processing centre of the paying bank, which ensures that the cheque is genuine before releasing the funds.
Under that anachronistic process, it takes six weekdays before a cheque fully clears and the recipient can be certain that the money is theirs. That is why Parliament legislated to allow UK banks and building societies to accept the receipt of cheques and similar instruments by electronic image. The new cheque image clearing system cuts down clearing times to the next weekday by sending a digital image of the cheque for clearing. Cheque imaging will also facilitate further innovation in the industry—for example, by enabling customers to pay cheques through their mobile banking app.
The purpose of the legislation under discussion today is to ensure that the electronic clearing of cheques has no detrimental impact on cheque users. It makes provision for two measures to achieve this, which will help to protect customers as the image clearing system rollout intensifies over the second half of the year. The first concerns the use of cheques as evidence of payment. Under the current model, a customer can request a copy of the paper cheque that they drew from their bank. This paper cheque can then be used as evidence of payment. To ensure that this right remains available, the measure ensures that a copy of the cheque, along with some additional information, can be provided to the writer of the cheque upon his or her request, and that this copy has the same evidential value as a paper cheque.
The second measure concerns compensation. In cases of fraud or error, the rules for compensation are set out in scheme rules by the Cheque and Credit Clearing Company. There is, however, no legislation stipulating under what circumstances customers must be compensated, or by whom. To prevent any potential harm for consumers from what is a fundamental change to cheque processing, the Government consider it necessary to legislate to ensure that cheque users are not left out of pocket if they incur a loss.
The second measure therefore provides that, where a customer incurs a loss under the image-clearing system and prescribed conditions are met, including that compensation has not already been received, the bank of the customer receiving the cheque must pay the compensation. Similarly, if the bank of the customer writing the cheque incurs a loss, where prescribed conditions are met, the recipient’s bank must again provide compensation if none has been forthcoming.
The Government believe that the existing industry-led approach works well. Indeed, the optimal solution is that the legislation need never be used as the scheme rules continue effectively to resolve losses from fraud or error. In summary, the Government believe that the legislation is necessary to ensure that customers can continue to trust that their cheque will be valid proof of payment under the new image clearing system and to provide a backstop for compensation. I hope this is helpful to colleagues and I commend the regulations to your Lordships’ House.
My Lords, first, I am delighted to hear the Government reaffirm that there is still a place in our financial lives for cheques. I remember that there was a time when the Treasury was considering their abolition. From looking at countries where cheques have in effect disappeared—talking to relatives in Germany, for example—it became clear that the way in which people compensated for that was to carry a lot more cash and leave a lot more cash at home. Much of that seem to be an invitation to petty thievery and street mugging, by which I do not think that any of us would be terribly charmed, so I am very glad that the Government have restated that today.
I looked through the regulations trying to think of something to say without finding very much. I have bank accounts in the United States, a legacy from my 20 years living there, and many states—I am not sure that it is all of them—already use this system of electronic presentation of instruments, so I have seen it first-hand and have never heard of any particular problems. There is a very good article in the Penn State Journal of Law in December 2015. The one issue it raises is that it is crucial to ensure that the rules minimise any surprises in any conflicting claims between the paper copy and its image. I understand from what the noble Lord, Lord Bates, said, that he feels that that issue is covered. If he can give me that assurance, I am delighted to welcome the regulations.
My Lords, I, too, have worked my way through the instrument and the accompanying Explanatory Memorandum—I also spoke to James Evans of the Treasury—and feel that I understand it. I have no objection. It would seem a sensible, modern improvement to the system.
In looking around the instrument, I alighted on the fact that it is a further extension of the computer systems which underline modern banking. Reflecting on recent press comment, I started to look at just how many computer problems the banking system had had over recent years. I counted at least four for RBS since 2012, three from HSBC, three in Barclays, three at Lloyds and, of course, the recent TSB event where 1.9 million customers were locked out of their online and mobile services.
As we know, banks have a special role in our society. If they fail, the impact is not a mere difficulty, as it is when a large enterprise fails; it is catastrophic to our society. The Bank of England has put an enormous amount of effort into creating an effective resolution regime which, because I have been in this role since 2010, I have seen all the legislation on. It has a resolution directorate staffed with people ready to move in if there is a problem with a bank to solve it over a weekend. But the problem seems to me to be that, just as a bank cannot be allowed to fail for financial reasons, it is increasingly true that a bank failing because of its technical capability—because of its computer services—would have an equally catastrophic effect on society.
I therefore ask the Minister whether, as we hand further tasks to these ailing computer systems, the regulators have an equivalent regime to ensure that the banks’ computer systems will never fail.
I thank the noble Baroness and the noble Lord for their questions. The noble Baroness is right to stress the importance of cheques continuing to be available. The evidence suggests that many voluntary organisations and charities, and some of the most vulnerable in our society, are the ones who rely on cheques the most, so it is important that their interests be safeguarded.
The noble Baroness asked about conflicting claims, and here we can draw on some historic legislation. The Bills of Exchange Act 1882 is explicit: should the payee’s bank compensate a customer for a loss in accordance with the proposed legislation, this does not preclude the payee’s bank recouping this payment from the party where actual liability lies. In addition, where there are competing claims, there is a process for resolving that issue. As I said, these regulations are very much a backstop to a system that we feel is already working quite well.
The noble Lord, Lord Tunnicliffe, who is always assiduous in going through the detail of such regulations, asked about the IT operations. He is absolutely right that, as we place greater and greater emphasis on IT systems, we should be cognisant that sometimes they can fail. The Cheque and Credit Clearing Company has assured the Government that the new clearing process will be as secure and reliable as the one we use now. The security standards used to design and build the ICS are industry-leading and were agreed by all the participants to the company’s security code of conduct. The ICS infrastructure has been fully tested and has been in live operation, processing digital cheques, since October 2017. It has already processed some 250,000 payments to date. Additionally, the ICS infrastructure operates out of two geographically distinct sites in order to provide resilience, and there is full duplication on both sites. Contingency plans and connectivity alternatives are available, should they be required. The infrastructure is 100% operated from within the UK.
I once again thank the noble Baroness and the noble Lord for their comments, and I commend these regulations to your Lordships’ House.