Optimising Transfer Agency...

Optimising Transfer Agency Settlement

Moving away from cheques

This information contained in this document is for the use of TA Forum members only and has been produced for guidance purposes and no accountability regarding the accuracy of the contents will be accepted by The TA Forum. This document must not be copied or distributed without prior consent from the TA Forum.

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Table of Contents

Page

1. Introduction & Executive Summary 3 2. The growth of technology in Financial

Services and payments 4 3. Benefits and key features of electronic

Payment methods and comparison to cheques 7

4. Inefficiencies of cheque clearing 18 5. Considerations for de scoping cheques from TA models 20 6. Conclusion 23 7. Next Steps 23 8. Appendix: Faster Payments Scheme Limits 25

9. Sources and references 26


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1Introduction & Executive Summary

There is a growing trend within Financial Services towards electronic solutions – with more digital payment channels than ever before: the narrative in the Financial Services industry at present is around ‘revolution’ and substantial change - driven by technology and innovation.

In this landscape - there is an opportunity to leverage the power of technology to make what we have better, for corporates, using it to eliminate operational inefficiencies. For Transfer Agents (TAs), specifically to provide improved service to their clients.

In this context of growing choice and efficiency of electronic payments - cheques can be seen as an increasingly inefficient means of settlement and enhance the risk of fraud to the extent that TA corporates and our clients should now consider moving away from cheques as a strategic goal and imperative. TA’s should be looking for opportunities to maximise the value of their services to their clients by looking for the most efficient settlement methods.

At a recent TA Forum Settlement Working Party meeting - during a round table review of members - it was revealed that some TA participants have already descoped cheques from their service models. For some context - of those in our group who still issue cheques – the percentage proportion of total payments that cheques represent is based on data received from a number of TA representative companies.

For those who have not descoped cheques from their service models – it was an agreed action of the TA Forum to consider the cessation of cheques as a settlement option in more detail. This paper is the initial result – and examines the case for moving away from cheque settlement in more detail; considers for context the increasing ubiquity of technological solutions in the Financial Services space; sets out some of the drawbacks of cheque settlement and gives comparative consideration to the merits of the digital / electronic settlement methods.

The conclusion reached is that businesses utilising electronic payment methods are able to improve their settlement processes and offer better customer experiences, whilst reducing risk.

Recommendations for future work in this area are made with the acknowledgement that more work and engagement needs to be undertaken with suppliers to understand feasibility and feedback has been sought from members of the IA to ensure industry wide acceptance.


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2The growth of technology in Financial Services and payments

Change is all pervasive within the Financial Services space, change in the main driven by technological advances and evolutions.

Technology is becoming more ubiquitous within and fundamentally important to the life of corporates and their clients within the Financial Services space and beyond. At a recent Barclays Digital Payments Summit a presentation noted the primacy of ease of accessibility and speed of execution as being key to the customer experience in Financial Services. Acknowledging the evolving landscape of customer expectation the speaker noted that successive generations are now emerging who are totally immersed in and expect to consume their services in digital and mobile solutions (1).

How is technology changing Financial Services and the Payments space?

The appetite for digital payment and Financial Services solutions is clearly increasing in tandem with the evolution of new technology, as the public become more conversant with electronic payments and financial services. Here we consider some areas in which this trend is evident.

Mobile banking: Ten years ago few foresaw the dramatic rise of smartphones and that banking would largely be transacted online and on mobile devices via applications (apps). The BBA reported in Q4 2015 that 22.9 million mobile banking apps have been downloaded to date, a rise of 8.2 million in one year, and that mobile banking is now used for transactions worth £2.9 billion a week. This growth is underpinned by the fact that Banks now spend £3 billion annually in investment into API’s (Application Programming Interfaces) for their retail customers to continue to use banking apps and services via smartphones, tablets and online. (2).

As we continue to evolve the way we use and engage with technology to make payments - 58 million contactless cards were issued by the end of 2014 (3). The UK Cards Association reported a 212% increase in the number of contactless transactions made in January 2016. (4).

Increased utilization of social media and online messaging channels is transforming internal and external communications channels for businesses as


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corporates realize the need to utilize channels their increasingly Tech savvy audience and employees expect and engage with.

Blockchain / Distributed Ledger Technology is creating new potential ways of validating payments and recording information on distributed easily accessible ledgers, potentially updated in real time - changing the way ledgers are accessed. Possible ‘real world’ applications will emerge for Distributed Ledger Technology as banks continue to investigate the underlying technology more widely to ascertain applications in areas that may take in payments and reconciliation amongst others.

Artificial Intelligence / Robotics is becoming more prevalent within the TA industry to improve automation, efficiency and streamline processes.

Some corporates are looking at Wearable Tech (eg Smart Watches) and in Japan the government have recently begun trialling biometric payments - whereby the retail customer can execute payments in certain outlets by having their retina or fingerprints scanned at account linked Point of Sale devices.

Even the age old and paper immersed bank account opening / management space has initiatives afoot looking at moving away from paper towards digitally hosted portals and solutions where corporates can instruct account opening/ closure and mandate change instructions online into the bank back office system (eBAM or Electronic Bank Account Management). As with the digital payments trend away from cheque – these online processes are geared to deliver faster more efficient account management.

In terms of the choice of digital / electronic payment methods – change is afoot and the variety of options is wider than ever before. The breadth and key features of these options are considered in detail in Section 3.

What of the non electronic payment methods? Cash and Cheque by comparison

The key to all of this change is the desire to make business faster, safer, and more reliable, with evolving technological solutions to support that vision. The increasing trend in the growth of technology and how it is changing the face of Financial Services, including how it is delivered and accessed, also needs to be considered in respect of the traditional ‘non digital’ settlement methods – cash and cheque.

Cash

In 2015 the value of non cash transactions overtook the value of cash ones. Payments UK reported that businesses, consumers, and financial organisations together made 18.3 billion cash payments during the year, versus 19.8 billion non-cash payments. Cash payments made up 48% of the number of transactions, with automated and card


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payments accounting for the remainder. Overall debit cards accounted for 24% of payments, followed by direct debits, at 10%. Cheques accounted for 2% of the market. (5)

In a recent report a further nod towards what economists call the ‘cashless economy’ and further acknowledgement of the primacy of electronic settlement methods was tabled by Peter Sands - the former chief executive of Standard Chartered Bank. The report recommended the phasing out of high denomination notes by central banks, noting that the usage of such notes within criminal, terrorist, and tax evasion circles, led to illegal money flows exceeding £1.4 trillion annually, and that G20 countries should focus on phasing out the notes to address the problem at root rather than focus on criminals. (6)

Cheques

In terms of cheques – their use in the UK has been steadily declining for several years. Business use began falling steeply in 1997 and has continued to decline as businesses increasingly move to automated payments. A 2012 report cited a 45% decrease in volumes of personal and corporate cheque settlement in the preceding five years (7). Whole market cheque usage has declined at an annual rate of 12% since 2008 (8).

(9)

http://www.theguardian.com/money/cheques


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This paper is not about phasing cheques out in the UK market: we know that the Cheque and Credit Clearing Companies ‘Future Clearing Model’ - as enshrined in the governments Small Business Enterprise & Employment Act - will bring about a change in how cheques are cleared in the UK from paper to image and a reduction to 2 day clearing. Despite that change - the fundamental inefficiencies linked to the process of issuing and receiving physical cheques will still be a factor. Indeed - the process of embedding the transition to the Future Clearing Model will itself represent cost for corporates - TA’s and our clients.

This report is about the potential for phasing cheques out in the TA sector - looking to optimise the electronic settlement methods available for the clients we service and their underlying investors, in the belief that those methods are more efficient and that corporates and TA’s employing those methods in place of cheques would be optimising their settlement service models for their clients. It should also be noted that some Fund and Asset Managers do not offer cheques inwards or outwards already - and some TA’s do not either as noted in the introduction.

3Benefits and Key features of Electronic Payment methods and comparison to cheques

The appetite for digital payment and Financial Services solutions is clearly increasing in tandem with the evolution of new technology, as the public become more conversant with electronic payments and financial services. The payments ecosystem also has more electronic settlement scheme channels and options than ever before: some of them are considered here – and comparison is given in each case against cheque settlement

Faster Payments (FP):

Offering real or near real time settlement – this scheme is experiencing double digit growth by comparison to BACS and CHAPS. To increase uptake on the outgoing payment side in our space there is arguably scope for the commercials of the proposition to improve - where FP per transaction costs can remain prohibitively expensive by comparison to other schemes i.e. BACS. There is potentially an opportunity for individual or group lobbying to the banking community from the TA sector – in regards to both the commercials and also urging banks not currently offering the £250k limit to do so.


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We know also that FP are reviewing moves to a £500k limit in 2017 and looking beyond at potential uplifts to £1 million and above (10). A table of current bank uptake of FP limits can be found in the appendix. At present only HSBC, Citibank and Barclays offer the upper limit in the UK. £250k rising would absorb much of the retail space traffic in terms of our payments out and in conjunction with the above represent opportunities for increased uptake and will reduce the use of cheques.

Key Features –

Launched in 2008 - FPS is administered as a scheme by Faster Payments UK and

offers real or near real time settlement of payments 24*7 - with Deferred Net

Settlement performed 3 times daily (banking days) by way of Central Bank funds

with the Bank of England. The money must be available in the receiving customer

account within two hours, but generally is available within minutes.

The first of its kind in a G10 country and the only 24/7 real-time service in

Western Europe FPS is Used daily, through internet, mobile and telephone

banking

The Service currently enables individual payments of up to £250,000: FPS are

reviewing moves to a £500k limit in 2017 with plans for further increases to £1

million and beyond.

Growing customer confidence in the service, combined with the explosion in use

of telephone and internet payments has driven rapid growth, breaking the

100million payments per month level and 20% year on year growth in volumes.

The scheme is experiencing double digit growth by comparison to BACS and

CHAPS.

August 2016 saw Faster Payments break the 120 million barrier for total amount

of payments processed. In total for August, Faster Payments processed 122

million payments, which is a 29% increase on the amount processed in August of

2015.

These payments amounted to a total £100 billion for the month - 26% increase

on the total of July 2015. 2016 saw 352 million payments processed by Faster

Payments, a 14% increase on the amount processed in Q2 of 2015

The total amount of payments processed during this quarter equated to £283

billion, which is a 16% increase on the total of Q2 for 2015.

2015 saw Faster Payments break the record for the amount of payments

processed in a single year - 2014 1.1 billion payments processed - 2015 the

figure grew to over 1.2 billion.

In total, there were 146 million more payments processed than 2014 - an

increase of 13%.

£903 billion were transferred via Faster Payments in 2014: 2015 over £1 trillion

were transferred.


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In total, there were £137 billion more processed in 2015 than 2014 - an increase

of 15%.

Comparative to cheques –

FPS settlement does not entail some of the key cost overheads associated with

cheques, key cost savings are as follows

Postage / courier costs

Bank clearing costs

Maintenance of stale cheque accounts Having to ‘protect’ in Client money un-

cashed cheque value

Potential risk of fraud - UK cheques are ‘open-ended’ under UK cheque law giving

rise to unlimited by value liability exposure / risk

Overheads of corporate cheque handling / storage / banking and dispatch

departments: FTE / cost savings associated with not requiring cheque clearing

infrastructure

Transitioning from cheques to FPS would allow corporates to avoid the inevitable

costs of implementing the changes arising from the Image Clearing System

project deliverable by October 2017

Manual matching / generation of letters / correspondence to cheques

Cheques being returned – wrong address / wrong payee

After 6 months having to investigate why a balance is o/s – stop and re-issue –

contact customers (and associated costs)

Some cheques do not get cashed as they are just so low in value and have to be

stopped

Un-cashed Distribution cheques – for some clients corporates hold those cheques

o/s for 6 years but for some the value of these have to be paid back to the

Trustee (and associated operational oversight)

Fraud risk of cheques (interception and conversion cases)

Future proof settlement/receipt models based by using FPS re its 24/7 real-time,

timed, irrevocable methodology.


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Strengths

o Real or near real time settlement

o Can be sent using existing BACs technology and protocols

o Better client experience (faster) than cheques and BACs.

o Business limits mean that a large majority of payments could be sent via

FP

o BACs have inconsistent narrative between recipient banks.

o The implementation of the new CASS rules on 1st June 2015 has

highlighted the need for real time payment analytics & systems, exposing

the current limitations of banking clearance & settlement models in

markets where participants & products require close intra-day liquidity

management, sequenced execution & market settlement optimised for

client protection.

o FPS improves TA’s ability to execute sequenced releasing of client money

transfers and payments to ensure certainty of fate / clearing achieved in

the appropriate order and to offset risk of using client monies to service

another clients payments

o Liquidity is more key than ever since the recent CASS implementations:

not needing to hold unpresented balances and lock them up in Client

Money bank accounts across several days by clearing with electronic

methods gives a cleaner more easily ascertainable picture of available

‘true’ liquidity.

o This results in reduced reconciliation and liquidity management effort and

oversight to monitor and account for positions.

o Ease of access to payment initiation – via bank front end payments

platforms:

o No overheads to TA’s to start using / transitioning from other channels to

FP as already an open enabled channel via banking platforms

o Enhanced settlement processes for distributions and Direct to Consumer

(D2C). Reduce cheques and associated costs.

o Multiple corporate access options in line with Payment Services Directive 2

(PSD2) objective to open up payments infrastructure access channels -

o Direct Membership – Enables a Payment Services Provider (PSP) to

connect directly into the Faster Payments Central Infrastructure to send

and receive Faster Payments. Directly connected Participants also perform

their own settlement with the Bank of England. Each Direct Participant

has to be a PSP and a credit institution.

o Direct Agency – As above, this option allows direct connectivity into the

Faster Payments Central Infrastructure via a sponsoring


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Participant(Barclays, RBS, HSBC) that offer Direct Agency services. The

sponsoring Participant will also perform Bank of England settlement. The

sponsor is providing the collateral to the Reserves Collateralisation

Account (RCA) account at the Bank of England on behalf of the

participant). For a Directly Connected Non-Participant (DCNP) partnership

is required with an Aggregator Service Provider.

o Enhanced settlement processes for distributions and D2C. Reduce

cheques and associated costs.

o Enhanced experience for end investor: no need to attend branch to bank

cheques: funds clear faster.

Weaknesses

o More expensive by comparison to both CHAPS – BACS & Cheque.

Increased uptake and bank coverage of limits will presumably drive costs

down? Faster Payments Scheme charges 3.5 pence per transaction (direct

member).

o Non - standard market coverage re limits: At present only HSBC, Citibank

and Barclays offer the upper limit in the UK.

o £250k rising would absorb much of the retail space traffic in terms of our

payments out and in conjunction with the above represent opportunities

for increased uptake and move away from cheques.

o On occasion the receiving bank is unable to take the payment

immediately, in which case the customer will be given a response

indicating when they can expect the funds to reach the account. Reasons

for this include an operational issue at the receiving bank or if the

receiving account does not permit immediate posting of the payment.

o Likely to require a change to have the system route payments over a

certain value via CHAPs as unable to make payment via FP due to limit.

o Reliance on external bank systems to transact FPs.

o Cheques can be clearly “branded”. More difficult to ensure electronic

payments have a consistent “look and feel”.

o For FASTER payments some banks have now reduced limits for non-

corporate clients to 1,000 although still a max of £10K per day. This could

be limiting given ISA limits exceed this

o Client bears the risk of sending to the wrong account - No guarantee.

o GBP only

o At times there are issues with returning the money to sender as these are

not transacted through the swift messaging system and this has a knock

on impact for CASS (holding balances and unallocated monies)


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Known issues or barriers to entry:

To increase uptake on the outgoing payment side in the Transfer Agency space

there is scope for the commercials of the proposition to improve - where FP per

transaction costs can remain prohibitively expensive by comparison to other

schemes i.e. BACS. There is potentially an opportunity for individual or group

lobbying to the banking community from the TA sector – in regards to both the

commercials and also urging banks not currently offering the £250k limit to do

so.

Some sort codes are not enabled to receive Faster Payments: work needs to be

done to ascertain the full scope of coverage gaps

Likely to reduce bank income (where moving from CHAPs to FP) as charges are

much lower than CHAPs, and therefore banks are not uniformly supporting this

Recent Tesco bank FP fraud has made banks more cautious on pushing FP.

Issues with returning unidentified balances. Could be unwitting participants in

“Layering” money laundering.

BACs:

The BACs suite of automated payments including standing orders, direct debit and direct credit have long been stalwarts of the UK settlement system (first Direct Debit 1970). The scheme uptake continues to grow across all products, with 5.8 billion Direct Debits and Credit processed in 2014. With £4.4 trillion worth of BACs transactions processed in 2014 – BACs is also looking at shortening its settlement cycle with a Board Strategy to review feasibility of moving to a 2 day settlement cycle for credit and debit files. An obvious advantage by comparison to cheque for retail funds inwards is that the DD process – once set up – is repeated periodically in an automated way. Irregular (ad hoc) direct debit could feasibly replace one off cheque investment payments.

Key Features BACs is the company which runs BACs Direct Debit and Direct Credit schemes in the UK. According to BACs over 150,000 organisations use Direct Credits for a wide range of payments In order to make payments or collections using their electronic schemes you will have a relationship with your bank or building society which ‘sponsors’ you to use the services, possibly with a Software Supplier or a third party Bureau – a combination of one or more of these organisations is needed to enable vendors to use the schemes.


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There are Rules which all organisations using the schemes – both BACs Direct Credit and Direct Debit – must adhere to. In particular payments to investors, please refer to The Service User’s Guide and Rules to the BACs Direct Credit Scheme, for further information. Comparative to cheques

Cheques BACs – direct credits

Security Whilst cheques are prescriptive in their payee and amount they have been known to get intercepted and the amounts / payee amended Where Banks often have a criteria to pick this up sometimes they have a value limit and therefore this can get missed and the cheque cashed.

This is a secure mechanism for investors to receive their cash and is driven by the standing data within the Register system. Whilst this can be subject to fraud attempts there are often bank validation processes in place. Where the investor’s bank changes or there is an error the details this can automatically be advised through AWACs (Advice of Wrong Account for credits service report) to the provider.

Cost There are costs in the following areas with cheques: Printing Postage Storing Certification Banking of cheques BCP cheques production and storage If there are any changes to the bank account or stationery these would also be a cost associated with this

There are set up costs in involved in the BACs set up, generally for the SUN (service User Number) and for the use of the service. The cost of sending a BACs credit is generally lower than a cheque

Investor experience

The investor has to receive and bank any cheque. This can be a positive experience for some

The receipt of a direct credit means that the investor does not have to make a trip to the bank


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clients resulting in not changing over to electronic methods. There is also a general perception that providing bank details could be intercepted and this used for fraudulent activities. This again reduces the likelihood of change. Additionally, cheques can be seen as onerous, the need to find a bank branch to deposit these and the time taken to manage this.

merely match the amount to any advice or where they are expecting the cash just check their account If these credits are not labelled and no advice is received this could leave the investor with a query

Set Up To set up cheque within a bank account can be minimal if a cheque book is required but for most Transfer Agents or Fund Managers this requires system capabilities and cheque sample sign off. This can be time consuming with quite a long lead time

It can take time to set up the system capabilities to utilise BACs, including systems and the service user number. There is testing with BACs required or with any payment bureaus used. This can be time consuming with quite a long lead time

Uncashed or Returned

If a cheque is not banked then this can sit as outstanding and in client money for 6 months before this is stopped and potentially reissued or no action taken.

There is an automated system in place with BACs for any unapplied credits. The reports will provide the reason for this and typically this is received within a few days

CASS implications

Cheque payments are classed as client money until they are cleared. This means that often there can be a large number of small value cheque payments within the client money account. The industry has seen legacy balances of this nature remain within the accounts increasing the

Where any monies flow through client money account this often has to be prefunded the night before as the timing of the BACs file is not certain. This can have funding and CASS implications and mean an alternative route is required.


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number of items and balance

Strengths:

The cost to send a payment by BACs is relatively cheap in comparison to other electronic methods and cheques.

If the systems are in place then relatively straightforward to send high volume, low value payments

Change of bank details via AWACs depending on debit or credit

Secure and reliable (proven track record) Simple to use

Weaknesses:

The requirement to submit tapes a number of days prior to the payment date and at times the need to have the funding available for this

Software requirements and having to test new files (time taken)

Set up time for the SUN Where Client Money is involved the BACs account would need to be funded as

the money can be debited at any time. Known issues or barriers to entry for BACs

Having a sponsor bank Software to manage the process

Set up time for the SUN

CHAPS:

CHAPS is a long established channel for both Business to Business (B2B) and retail sector same day payment processing: like BACs it can be utilised for the push of funds in preference to cheques, with funds clearance on pay date.

Key Features

On 9th February 1984 the CHAPS sterling system commenced operations. Now, over 30 years on, comparative numbers are around 150,000 payments with an aggregate value of around £280 billion


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The Clearing House Automated Payment System or CHAPS is the UK’s real-time, high-value sterling interbank payment system, where payments are settled over the Bank's Real Time Gross Settlement (RTGS) infrastructure. CHAPS processes both wholesale (eg, international payments) and retail payments (eg, house purchases). CHAPS Clearing Company Ltd operates the CHAPS payment system. August 2016

In August 2016, CHAPS processed 3.3 million payments worth £6.4 trillion over 22 settlement processing days.

The average daily volume was 149,230, an increase of 3.5% from August 2015.

The average daily value was £292 billion, an increase of 12.2% from August 2015.

In the first half of 2016

The average daily volume was 153,285, an increase of 3.5% from January - June 2015.

The average daily value was £293 billion, an increase of 9.9% from January - June 2015.

Last year

In 2015 CHAPS volumes grew by 2.8% to a record 37.5 million; on average 148,412 per day.

This beat the CHAPS record in 2014 of 36.5 million payments.

The total value transmitted in CHAPS in 2015 grew by 0.7% to £68.4 trillion; on average £270 billion daily. The value transmitted started to grow from August 2015 onward (compared with the same month the year before

Strengths

Same day transfer

No limits Extended cut off time to 18:00 (GBP – currency cut - off’s are earlier and

differing) Weaknesses

High costs Large value payments are sometimes delayed due to additional security checks

PAYM / ‘Tokenised Payments’:


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Works by associating a bank account to a mobile phone number – giving rise to the ability to push funds electronically whilst not needing to be party to the recipients payment account details (thus desensitizing the issue of needing to know account details - akin to a cheque in that regard). Currently 16 bank institutions use PAYM: 1.9 million customers registered for it in 2014; the average transaction value is £54. (11).

Whilst designed for the retail low value sector – possible options for applicability in our industry exist, with some questions and challenges to be navigated. If banked at a bank within the scheme and the bank enable to PAYM option - corporates may be able to associate their receiving account details to a mobile phone number – to be publicised within their marketing literature. This would afford the option of a new funds inwards channel for corporates. Challenges exist around payment referencing / identification and there is a question mark as to whether this channel can be scaled up to become a more ubiquitous and universal payment method – not least of which is the comparatively low limit.

Debit Cards:

In the digital payments market the growth and increasing ubiquity of payments cards is considerable: in Jan 2015 the UK Cards Association reported 1.05 Billion transactions – up by 10% on the previous year. The TA sector is seeing an increasing number of its clients wanting to utilise cards collection as a key service, however fraud rates are an important factor that need to be considered in any increased usage.

Debit card settlement for mutual fund deals is a commonly accepted form of settlement,

particularly when deals are taken over the phone or placed via a website.

Strengths

Well understood by the client as it is typically used for smaller retail transactions

Can provide guaranteed cleared monies to the provider where “Verified by Visa”

or “MasterCard SecureCode” are used allowing clients to deal immediately on

those monies.

Transactions can be made for any amount provided there are sufficient funds in

the cardholder’s bank account. In practice some banks impose limits, but these

are now £100,000 and therefore are sufficient for the majority of retail investors.

There are many payment providers with “white label” solutions which mean that

it is relatively straightforward to implement a debit card payment solution.

Weaknesses


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Any debit card payment system needs to be integrated into a firm’s back office

solution.

Any Mail Order/Telephone Order (MOTO) transactions that do not use Verified by

Visa or MasterCard SecureCode, could be dishonoured leaving the company to

pay the bill for any related fraud.

Linked to the above, the risk of fraud on debit cards has increased significantly in

recent years.

Monies take 48 hours to clear, which is generally better than a cheque, but not

as fast as an electronic funds transfer.

MasterCard have recently changed their charging structure and this links the

charge to the size of the transaction placed. On a full ISA subscription this is

equivalent to a 1300% increase in the cost of the transaction to the company.

If Visa decide to follow suit, this will significantly drive up the cost of debit cards.

SWIFT:

Although not per se a payment method - Swift solutions have long been central to the payments disbursement of corporates offering a payment messaging channel utilising the other schemes. At the beginning of April SWIFT announced that 21 banks have signed up to new global payments innovation initiative intended to improve the experience by increasing the speed, transparency, and predictability. SWIFT settlement continues to be widely utilised in the UK, Europe and globally.

All of the above methods are available today and it would be advantageous to adopt electronic payment mechanisms where possible over cheque settlement.

4 Inefficiencies of cheque clearing

There are several areas to consider when reviewing the efficiency and applicability of cheque clearing by comparison to electronic methods: some of them follow

Regulatory presentation and liquidity considerations


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The very recent changes in CASS regulations have meant that electronic payment mechanisms can be viewed as being significantly more efficient than the current cheque settlement processes where for many corporates issuance and receipt must now be from and to a client money account. Some electronic settlement affords corporates the opportunity to utilise the Delivery Versus Payment (DVP) exemptions.

Cheques can clear across the 2-4-6 standard and vary from bank to bank: this gives rise to a need to hold large unpresented cheque balances within client money accounts and reconcile those positions across extended periods. Cheques can go unpresented for a significant period of time necessitating lock in of monies to client money gone away and unclaimed accounts: this problem with uncleared funds requiring protection is less of a consideration with electronic settlement.

TA’s are also coming under increasing pressure from the FCA to engage clients and attempt to clear these aged held client money balances: continuing to issue cheques will extend the necessity to support a re-issue and repatriation process and add to servicing costs for e.g. client mailings outwards.

Liquidity is more key than ever since the recent CASS implementations: not needing to hold unpresented balances and lock them up in Client Money bank accounts across several days by clearing with electronic methods gives a cleaner more easily ascertainable picture of available ‘true’ liquidity. This results in reduced reconciliation and liquidity management effort and oversight to monitor and account for positions.

‘The payments journey’: Certainty of fate is increased with electronic means: cheques can become intercepted / lost / delayed more readily and once issued the issuer has no sight of / recourse or audit of the whereabouts: this is true to a lesser degree once in clearing but cheques are not traceable in real time within clearing

Interest accrual on funds clearing by cheque will not happen until day two in the 2-4-6 clearing cycle: same day clearing electronically remitted funds will attract interest (if applicable) on day of settlement

Cheques can be bounced unpaid up to 6 days: this outcome necessitates amendments to reconciliations, and the costs and inefficiencies associated to that outcome

Logistical and clearing challenges and associated costs:

There are significant logistics / costs associated to getting cheques into clearing on the inwards side, courier, and physical handling costs. For corporates there is a reliance on physical transportation to get cheques to


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clearing centres as well as the costs of postage. In the retail cheque recipient space there is a requirement to attend branch to pay cheques inwards

Image Clearing System implementation costs: multi bank corporates have a particular challenge with banking monies inwards: either send their images to the banks through separate bank hosted solutions or become a Direct Corporate Participant to the new image based clearing switch: there will be costs of implementation for corporates, process changes required and potential increases in bank tariffs for cheque clearing post the change.

In a recent development RBS have closed a clearing receipt centre near London and centralised it to their Midlands Shepshed operation – part of pre Future Clearing Model efficiency drives. This centralisation of clearing infrastructure has added cost and timing issues to getting cheques to clearing for corporates and further inconvenience to the logistics of the process

Change admin costs of needing to maintain lithographic signatory mandates and change manage them: significant associated overheads and costs:

Security:

necessity (and risk) of having lithographic indemnities between bank and client to guard against misuse of lithographical fraud

ease of cheque interception / being lost and falling into wrong hands: ease of conversion and complete manufacture of fraudulent cheques

An important consideration in conclusion is that communication and engagement on the options for settlement is a key factor. Discussing their strategy to move away from Cheque based settlement where possible and permissible within the sectors serviced - at a recent ‘Barclays Digital Payment Summit’ event Andrew Davies Head of Business and Innovation at Capita pointed out that ‘primacy of educating consumers and clients as to the relative merits of electronic payment methods is critical’ if corporates are to successfully pursue this strategy (12).


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5Considerations for de scoping

cheques from TA service models

Each member would need to consider process and service model implications inherent in de scoping cheques form their service models both in the payments inwards and outward side

Consideration should potentially be made between the ease of descoping cheques ‘outwards’ whilst retaining cheques inwards as a viable investment channel

Investor identification and bank account details verification is commonly undertaken by cheque so impacts and alternatives would need to be assessed.

Need to consider investor sentiment if option to pay away by cheque is removed

and request for bank details is made.

Corporates may need to determine the number of holders on their systems that do not have bank accounts and engage that client base to request this information.

Once we have all the replies that we are likely to get then the fund documentation will be changed.

As this is a pre-notifiable event – removal of a route to investing in the funds - all

shareholders would need to be written to explain the reason for the change.

Fund documentation e.g. prospectus, would potentially require amending

Cheques Inwards

Challenges

Cheques remain a popular method for transacting investment business. High

daily volumes are experienced during ISA season and realistically no business is

going to want to shut off a potentially lucrative revenue stream.


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Age of customers also impacts their use of cheques with a general trend that

some sections of the older population may prefer to use cheques

Cheques are an effective method in confirming source of funds

Extensively used in North America

Some see cheques as the cheapest and most secure method for large (>£10k)

transactions.

Options

Electronic cheques. The Image Clearing System - due to come in from October

2017 - could result in a boost in the popularity / use of cheques.

BACs - Not available to ordinary retail investors

CHAPs - Fast but expensive method. Flexible in terms of timing

Faster Payments - limits vary between banks

Cheques Outwards

It should be more straightforward to remove cheque payments - as issuance is

within the TA’s control.

Replacing cheques with FP should be easy for users of the scheme with re-

mandating exercises required

However, cheques may still be considered an effective method of sending

payment where we cannot confirm a client’s bank account details.

Cancelling and reissuing cheques and circumstances where both the cancelled

and the reissued cheques are cashed can be a real problem.

Cheques are consistently used for “transfer out”. We need to address this

separately and remove the requirement to send cheques between transferor and

transferee. Requirement for an agreed format for electronic messaging for BACs

and FPs. There is a 2016 government consultation on this – in which one of the

questions posed is ‘can cheques be descoped from Transfer out settlement

between participants’. Regulation may arise in this space if market participants

do not address what are perceived as intra – market settlement inefficiencies.


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6Conclusion

A key objective of the TA Forum Settlements Working Group is to look at reducing risk, standardising industry processes whilst improving operational efficiency, based on the findings detailed in this paper, the Group supports the initiative to move away from cheque settlement and consider alternative electronic methods, the Settlements Working Group will now look to work with the various suppliers to overcome the challenges identified.

7Next Steps…

• Member review of this white paper for feedback / additions / corrections (completed August 2016) – COMPLETED

• As a group – ascertain strategy: undertake a more detailed review of opportunities and applicability of electronic settlement methods to our business models – processes and client appetite, whilst also addressing limitations. - COMPLETED

• Engage forum clients opinion and other industry bodies on their view of applicability / whether they agree to this strategy - ONGOING

• If an agreed strategy – how would this be communicated to the underlying client / investor and implemented by TA’s in conjunction with the clients they service: How can the TA community assist with this communication strategy? – ONGOING

Engagement of all suppliers so challenges identified can be overcome.

Paper will be updated following discussion with suppliers.


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8Appendix: Faster Payments Scheme Limits Business / corporate account transaction limits

Business / Corporate One-off and forward dated payments

Branch Phone Online

Bank of Scotland N/A On request £99,999

Barclays UK Business £25,000 Business £15,000 Business £50,000

Corporate/FI £25,0000 Corporate/FI £250,000 Corporate/FI £250,000

Corporate / FI – via Direct Corporate Access (DCA) £250,000

Citibank £250,000 £250,000 £250,000

Clydesdale £10,000 £10,000 £100,000

Co-operative £100,000 £100,000 £20,000

HSBC £10,000 £10,000 £250,000

Lloyds N/A On request £99,999

Natwest £100,000 £100,000 Business £20,000 - 30000 Corporate/FI

100000

Northern Bank Ltd T/A Danske Bank

£100,000 £50,000 £100,000

Royal Bank of Scotland Including Ulster Bank

£100,000 £100,000 Business £20,000 - 30000 Corporate/FI

100000

Santander UK plc N/A £100,000 £100,000

Yorkshire Bank £10,000 £10,000 £100,000

Information is updated as and when a limit changes. Last update: 11 January 2016


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9References

1: Barclays hosted Digital Payments Conference - 10th May 2016.

2: British Banking Association ‘The Benefits of Banking’ publication – 2015.


4: 3: UK Cards Association referenced in Raconteur publication ‘Future of Payments’ – 24th April 2014.

5: Payments UK 2015

6: ‘Making it harder for the bad guys: The case for eliminating higher denomination notes’ a report of the Harvard Kennedy School for Business and Government- February 2016.

7: ‘Cheques and Cheque Clearing: The Facts. A guide to cheques and the UK cheque clearing system’ – Cheque and Credit Clearing Company 2012.

8: ‘The Demise of the Cheque’ - UK Parliament Report - Library of the House of Commons – author Timothy Edmonds.

9: ‘The Demise of the Cheque’ - UK Parliament Report - Library of the House of Commons – author Timothy Edmonds.

10: Craig Tillotson CFO Faster Payments Service – Electronic Affiliates Interest Group meeting – 22nd Feb 2016.


12: Andrew Davies – Head of Business and Innovation Capita - Barclays hosted Digital Payments Conference - 10th May 2016.

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