skip tocontent

ombudsman news

issue 26

March 2003

banking - the cheque is (lost) in the post


  • Miss Jones banks with Multinational Bank.
  • She writes out a cheque to her uncle, Mr Jones, and posts it to him.
  • The cheque is intercepted in the post by Mr Sykes.
  • Mr Sykes pays it into an account with Conglomerate Bank.
  • Conglomerate Bank collects the money from Multinational Bank.

That is called "cheque conversion", because Mr Sykes (deliberately) and Conglomerate Bank (innocently) have committed the legal wrong of "converting" the cheque.

How does Mr Jones stand- Once the original cheque has gone through, Miss Jones will not want to pay her uncle a second time. There is little chance of Mr Jones getting the money back from Mr Sykes, even if he can be found. Can Mr Jones get the money back from Conglomerate Bank (which collected payment of the cheque) or Multinational Bank (which paid the cheque)-

Mr Jones is not a customer of either bank. So does the Financial Ombudsman Service have power to accept a complaint from him- The answer is that we cannot accept a complaint from him against Multinational Bank (the paying bank), but we can accept a complaint from him against Conglomerate Bank - if he is what the law calls the "true owner", or "the person entitled to immediate possession", of the cheque. Our rules cover "non-customers" in some specified circumstances, and this is one of them.

Normally, the "non-customer" will be the person to whom the cheque is made payable. But that is not so in every circumstance. The law on this is complex and financial firms sometimes try to argue legal points why, they say, we do not have power to deal with the complaint. Here are two examples.

the person who wrote the cheque ceased to be the true owner on handing it over

Mr A bought a second-hand car from B & Co, a partnership. He wrote out an account-payee cheque (one that can only be paid into the account of the payee named on the cheque) in favour of B & Co. Mr A handed the cheque to one of the partners - Mr W. But instead of paying the cheque into the account of the partnership, B & Co, Mr W paid it into the account of B & Co Ltd - a limited company he owned. The car turned out to be no good, and Mr A had problems getting his money back from B & Co. So he tried to claim against B & Co Ltd's bank, on the basis that the cheque had been "converted".

But Mr A could not bring a complaint to the Financial Ombudsman Service. When the cheque was paid in to the "wrong" account, Mr A was not the "true owner" of it. The cheque had been received by Mr W, who had authority to receive it on behalf of the partnership, B & Co. So the "true owner" was B & Co.

the person to whom the cheque was made out became entitled to it when it was posted

Mr F was expecting a cheque, but it did not turn up in his mail. He eventually found out that the cheque had been intercepted in the post, and had been paid into a fraudulently-opened account. So Mr F brought a complaint against the bank that had opened the account and allowed the cheque to be paid in.

The bank argued that we did not have power to deal with Mr F's complaint - because a cheque is actually a bill of exchange. The law says that a bill of exchange cannot be "issued" until it is "delivered". The cheque was not actually delivered to Mr F, so it was never "issued" and Mr F could not have become the true owner.

This is an area where the law is a little unclear. We preferred the view that posting a cheque to the payee constitutes delivery, if the payee has expressly or by implication authorised despatch by post. That is because the UK Post Office will not allow the sender to reclaim a letter once it has been posted, so the Post Office effectively becomes the agent of the payee.

What if the cheque had fallen off the back of a Post Office lorry, had been found in the street, and a court was required to say who was entitled to possession of it- We found it difficult to conceive that the sender of the cheque would have disputed it was Mr F's, or that a court would have ordered that it be given to anyone other than Mr F.

So we concluded that Mr F was entitled to immediate possession of the cheque - and, as a result, his complaint came within our jurisdiction.

In our original example, Conglomerate Bank is liable to Mr Jones unless it can show that it acted in good faith and without negligence. It is for the bank to show this, not for Mr Jones to show the contrary. There is usually no question that the bank acted in good faith, so the case is likely to turn on whether the bank can show it acted without negligence.

Mr Sykes probably opened an account in the name of Mr Jones before paying in the intercepted cheque. But banks and building societies are required to check the identity of new customers - particularly in order to comply with the regulations designed to prevent money-laundering. What did Conglomerate Bank do-
If it did not check the fraudster's identity, it will have been negligent. If it did check the fraudster's identity, but was fooled by forged documents, it all depends on how carefully it checked and how good the forgeries were.

Remember that it is for the Conglomerate Bank to show it was not negligent. If it cannot produce copies of the documents, whether or not the money laundering regulations required it to keep copies, then it may not be able to show this.

Here is an example of where a bank failed.

true owner of cheque recovers compensation from collecting bank

Someone calling herself "Ali Smith" opened an account. Shortly afterwards, she paid in a £6,000 cheque payable to "Alison Jane Smith". A week later, she drew out almost all the money - and then disappeared. It turned out that she had intercepted a cheque on its way to the real Alison Jane Smith, who tried to reclaim the £6,000 from the bank. It refused, saying it had acted in good faith and without negligence. But we upheld her complaint.

The bank said it had verified the fraudster's identity from a driving licence, and her address from a gas bill. But no one of that name lived at the address given, and the bank accepted the documents were forged. It said they must have been very good forgeries to have fooled its staff, so it had not been negligent in accepting them.

The name given by the fraudster differed from the name on the cheque. So the forged driving licence must have disagreed with one or the other, or both. It is one thing to accept a cheque in a nickname for a known customer. It is quite another thing to open an account for a new customer in a nickname and then to accept a cheque carefully made out in a full name. And the bank's own procedures required it to also check the electoral register if it was lending money (and so was itself at risk).

The bank had not kept copies of the documents, so we could not check whether the forgeries were convincing or merely crude replicas. It was for the bank to show it had not been negligent. It told us it was not practical for it to keep copies. We found it difficult to accept that the bank could not afford to make and keep photocopies. If it took the business decision to save costs in this way, it had to accept the associated risk that it might not be able to show it was not negligent when things went wrong.

We are not saying that financial firms have to keep copies of identification documents. That is for them to decide. But we are saying that, if they do not keep copies, it may be harder for them to show they were not negligent. They need to balance that risk against the costs involved.

Walter Merricks, chief ombudsman

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.