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ombudsman news

issue 42

December 2004/January 2005

banking: automated payments

There are three payments systems in UK banking, all overseen by the Association for Payment Clearing Services (APACS). In previous issues of ombudsman news we have looked at the system for clearing cheques and that for clearing standing orders and direct debits.

This month, we look at the third system – the Clearing House Automatic Payments System – usually referred to as "CHAPS". CHAPS is used by both banks and building societies and references throughout this article to banks and bank accounts include building societies and building society accounts.

what is CHAPS-

CHAPS is a system used for high-value transactions, where money is transferred from one bank to another on the same day. Banks themselves use CHAPS to move money around the financial system, but it is also used regularly by:

  • businesses:
    where one business transfers money from its bank account to the bank account of another business; and
  • solicitors/licensed conveyancers:
    to transfer the purchase price of a house between the bank accounts of those representing the buyer and the seller.

Private individuals seldom make CHAPS payments themselves. They are most likely to come across these transactions when buying or selling a house.

how is CHAPS set up-

The main banks and larger building societies are "direct" members of CHAPS. There are also over 400 "indirect" members – typically smaller banks and building societies who have access to the system through a "direct" member. This arrangement is similar to the way the cheque clearing system is set up.

Payments are made electronically and should start and finish on the same day. CHAPS opens for business at 6.00am each day and payments usually have to be started by 4.00pm. But there is a facility to make late payments, in certain circumstances, up to 5.00pm.

Regular users of CHAPS can give their instructions for payment electronically, usually using internet or electronic banking. But a large number of instructions for CHAPS payments are still made by customers filling in forms manually. And although the payment itself is made electronically, the sending bank has to make various clerical checks first – typically to check signatures/payment authorities, as well as to ensure customers have enough money in their accounts to make the payments.

how does a CHAPS payment work-

This can be illustrated by looking at a typical CHAPS transaction, where an individual asks solicitors to complete the purchase of a house on a particular day.

We will assume that the solicitors already have the money needed for the transaction in their "client account" – the separate bank account that solicitors are required to use for client’s money.

So we begin at the point on "completion day" when, on behalf of their buyer client – the solicitors start to make the payment from the solicitors’ client account.

flow diagram

what can go wrong-

When things go wrong, the consequences can be extensive and wide-ranging, bearing in mind that a fair amount of money is usually involved.

The two most common problems are:

  • delays
    when the money arrives late; or
  • faulty instructions
    when incomplete or incorrect payment instructions cause problems in crediting the money to the right account when it arrives at the receiving bank.

case studies

banking: automated payments

The following case studies, based on recent complaints, illustrate some of the problems that can occur.

42/1
delayed CHAPS transaction – bank exceptionally busy – unable to process payment until very late on the specified day – whether it is liable for costs resulting from the delay

Ms W, a sole-practitioner solicitor, was acting for Mr and Mrs F, who were first-time house buyers. At 9.50am on Friday 28 February, Ms W handed in a written CHAPS instruction to her branch of Bank A, asking it to send £135,000 to the seller’s solicitors’ client account at Bank B.

At 11.10am, having first checked the CHAPS instruction, the branch of Bank A faxed it to Bank A’s processing centre.

Nothing then happened until 4.25pm when, after completing further checks, Bank A’s processing centre authorised the payment. The money arrived in the seller’s solicitors’ client account at Bank B at 5.40pm. By then it was past the time specified in the purchase contract. It was also too late to complete the deal that day – let alone to use the money to complete the seller’s own purchase and the other transactions further up the chain.

This meant that Mr and Mrs F’s house purchase could not be completed until the next working day – so they had to wait over the weekend until Monday. The knock-on effects were even worse further up the chain of property transactions – parts of which could not be completed until the Tuesday.

Bank A told Ms W that the delay was caused by an exceptional rush of CHAPS transactions. But Ms W complained that Bank A had been grossly negligent in holding on to her CHAPS instruction until 4.25pm. This had caused her and her clients unnecessary stress and inconvenience. She wanted Bank A to pay the additional interest and costs that Mr and Mrs F incurred as a result of completing late.

Ms W said that Bank A knew she was a solicitor who specialised in property transactions. So she thought the bank should reasonably have realised what the payment was for – and that other transactions would be delayed if it did not make the payment promptly. She said it should have been prepared for a rush of business on a Friday. Fridays are always the busiest day of the week for such transactions – as most buyers like to settle in over a weekend. There are also more transactions made, as in this case, at the end of a month.

But Bank A did not agree. It said it had met its obligations by making the payment within the day. It drew Ms W’s attention to the clause in the CHAPS instruction that she had signed. This said that "no liability will attach to the bank in respect of any losses arising out of delays or errors unless they are directly due to negligence on the part of the bank or its staff". Dissatisfied with the bank’s response, Ms W came to us.

complaint rejected
We asked the bank if it had foreseen the likely increase in payment volumes on the day in question. It was eventually able to prove to our satisfaction that it had done so and had brought in all available staff to help deal with these transactions. Unfortunately, the volume of transactions that day was exceptionally high and there were no more staff that it could possibly have brought in.

Because of that, and the very unusual nature of that day’s business, we decided Bank A was not liable in this particular case. But if it had been a "normal" Friday at the end of a month, we could well have concluded that Bank A should have made the payment more quickly and that it was liable, even though the payment eventually reached its final destination just within the same day.

42/2
CHAPS transaction – inadequate payment instructions result in problems applying the money when it arrives at customer’s bank

After he retired, Mr V decided to sell his flat and move to Italy. He asked his solicitor to send the net sale proceeds to his current account as soon as possible after completion. He then set off for Italy by car. He planned to spend a couple of weeks touring through France before heading for Milan and completing the purchase of the property he was buying there.

However, when Mr V’s bank received the CHAPS payment it was not sure what to do with it. The payment instruction did not give Mr V’s account number or identify the branch where he held his account. All it gave was his name and the address in England that he had recently left.

Instead of just returning the money to the solicitor, Mr V’s bank tried to sort matters out. It trawled through its records to find an account in Mr V’s name at the address given on the payment instruction. It was unable to find details of Mr V’s current account, because he had already given the bank his new address for that. But it did find his savings account, for which he had forgotten to update the address details, so it credited the money to that. Then it sent him a letter, saying what it had done. But that went to the old address – so Mr V did not receive it.

Mr V expected the money from the sale of his flat to be safely in his current account within a day or two of his leaving the UK. He planned to use his debit card to pay for meals, petrol and accommodation while he was en route to Italy. But almost as soon as he reached France, Mr V began to have problems using his debit card. His bank was refusing debit card payments because it said there was insufficient money in the current account.

Some months before he left home he had signed up with an agency that offers help to British people moving abroad. He contacted the agency as soon as he began having problems using his debit card. The agency arranged to lend him some money and he asked it to phone his bank to sort things out for him. But the bank would not discuss matters with the agency, because of customer confidentiality. The bank was concerned that some kind of fraud was being attempted, since the agency seemed to know Mr V’s security details.

Eventually, Mr V decided he would have to return to the UK to sort matters out. His bank blamed Mr V’s solicitor, saying that he had not given adequate information. The solicitor blamed Mr V’s bank, insisting that he had given full payment instructions at the outset. It eventually became clear that it was the solicitor’s bank that was really at fault – because it had missed off the crucial information when sending the CHAPS payment to Mr V’s bank.

complaint settled
We concluded that Mr V’s bank had acted reasonably in trying to work out where to credit the money. And even if it had traced the current account, in the absence of any indication to the contrary it would still have been reasonable for it to credit the money to Mr V’s savings account, where it would earn interest. Even if it had written to Mr V at his new address, he would not have received the letter until he arrived in Italy, long after his problems in France.

Mr V’s bank recognised that he had suffered a fair amount of distress and inconvenience, even though that was not really its fault. It knew that he could not pursue a complaint against the other bank, because he was not its customer. So Mr V's bank offered him £500 as a gesture of goodwill. We felt that was fair and we encouraged him to accept.

Walter Merricks, chief ombudsman

ombudsman news issue 42 [PDF format]

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.