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ombudsman news

issue 34

January 2004

banking - "but I thought the cheque had been paid"

The increasing popularity of payment methods such as debit and credit cards means that people are tending to use cheques less frequently than in the past. Even so, nearly 12 million cheques are written every day in the UK. That means there is still plenty of scope for things to go wrong, and we continue to get a steady flow of complaints relating to this method of payment.

Many of the problems we see come from the way the clearing system operates - often because many customers, and indeed some bankers, do not understand how it works. Here's a simplified explanation of what generally happens:

Day 1 Mr X goes into a branch of bank B (where he has his account) and pays in a cheque. The cheque was drawn on a branch of bank A. At the end of that day, bank B puts the cheque in the clearing system.
Day 2 the cheque arrives at the central clearing system's "exchange house". It is collated with other cheques drawn on bank A and they are all sent off to bank A at the end of the day.
Day 3 the cheque arrives at bank A and is normally then paid. But if there isn't enough money in the account, it may bounce. In this example, we will assume that is what has happened to the cheque Mr X paid in. So bank A sends the cheque back to bank B by first-class post.
Day 4 if the post is prompt, the cheque arrives. Bank B then writes to Mr X to tell him the cheque has bounced. (The decision to bounce a cheque can be delayed, in certain circumstances, until the following morning. For high value cheques, the "bouncing" bank - in this example, bank A - will phone the other bank. Otherwise, it may be necessary to add a day.)
Day 5 if the post is prompt, Mr X gets the bank's letter. This is normally the first indication the customer has that there is a problem with a cheque.

Weekends and bank holidays do not count in the overall timescale and there can be an extra day's delay if - for example - one of the banks is in England and the other is in Scotland (because of different clearing practices). Further delays can arise if the customer's account is, say, with a small bank or building society that uses another bank to process its cheques.

Most cheques pass through the system without a hitch. But what if the customer wants to know for sure that the cheque has been paid before, for instance, he releases goods to someone- How can the customer be certain that the cheque has been paid- The simple answer is - with some difficulty, unless the customer pays a separate fee for "special clearance".

Banks and building societies normally treat cheques as "cleared" after sufficient days have elapsed for the cheque to have completed the standard clearance cycle. They generally indicate this by updating their computer systems to show that the money is "available for withdrawal".

So, continuing with our example, if - on the afternoon of day 3 in the clearing cycle - the customer asks to withdraw the money that the cheque represented, there's a good chance that the bank will say "yes". This will be because, having expected the cheque to be cleared by then, the bank will have updated its computer system to show the money as available for withdrawal. But saying the customer can withdraw the money is not the same as saying the cheque has cleared and been paid. So it is no help if what the customer wants to know is whether the money is definitely theirs.

Even if the customer uses a more technical word and asks if the cheque has "cleared", the bank may misunderstand and say "yes", because the computer system has been updated to show that the money is available for withdrawal. But that's still not the same as saying that the cheque has been "paid", and the money is guaranteed. Different problems arise when a cheque gets lost in the clearing system. Often, the customer knows nothing about the loss for quite some time - usually because the customer's bank doesn't know anything about it either. The customer will reasonably have believed that the cheque had been paid, so it comes as quite a shock if they find that the bank then wants the money back.

In cases that come to us, we generally take the view that the firm - not the customer - is the expert. Unlike most customers, banks and building societies deal with these transactions every day. So if a customer ends up releasing goods to someone and then, some time afterwards, finds out that the cheque has bounced, we could decide that the customer's loss arose directly because of the firm's failure to give proper and correct information. Or we might think that the firm failed to understand the true nature of the customer's enquiry when it should have done.

The following case studies illustrate some of the problems that can occur with the payment of cheques.

case studies - banking - "but I thought the cheque had been paid"

exchange of goods on basis that bank said cheque had been paid - cheque subsequently bounced - whether bank liable for customer's loss

Miss F advertised her much-loved classic car for sale in a specialist car magazine. A week later, a Mr H came to see it. After a successful test-drive, he agreed to buy it for £9,000. He wrote Miss F a cheque and they agreed that she would pay the cheque into her bank account. Once the money had been "safely received", Mr H could then take the car.

Miss F paid in the cheque on a Tuesday. The following Friday, she asked her bank if it had been paid. The bank told her it couldn't say for sure, and that she should ask again the following Monday. She went into her branch first thing on Monday morning and the cashier told her the cheque had been paid. So Miss F rang Mr H and he collected the car that afternoon.

The next day, Miss F received a letter from her bank - the cheque had bounced. She tried calling Mr H, but the mobile phone number he'd given her was "unobtainable". And he had not given her his address. Miss F complained to the bank that she had lost out because of its actions, but the bank said it had done nothing wrong. Dissatisfied with this response, Miss F came to us.

complaint upheld
Miss F's bank had sent the cheque to Mr H's bank through the clearing system. On the Monday morning that Miss F had gone into her bank, Mr H's bank had returned the cheque unpaid. It did this because it had just been notified that a man claiming to be Mr H had been using cheques stolen from the "real" Mr H. However, at the time Miss F went into her branch, the fact that there had been a problem and that the cheque had bounced had not been recorded on the bank's system. The system was still showing the money as "available for withdrawal", so the cashier had told her the cheque had been paid.

The bank agreed that it had told Miss F the money was available for withdrawal. And we were satisfied that she had asked about the specific cheque, she hadn't just been making a general enquiry about her account. So we concluded that when the bank told Miss F on the Monday morning that the cheque had been paid, it had been negligent. At that point, there was still a significant chance that the cheque could bounce.

Miss F had only allowed the man to take her car on the strength of what the bank had told her. So we said it should reimburse her with the £9,000.

customer pays in cheque for friend and withdraws £3,000 cash - cheque bounces - whether customer used knowledge of clearing system to defraud bank

After Mr P received a cheque for £3,000 - made out to himself - he endorsed it over to his friend, Miss C. Mr P lived in Portsmouth, but he paid in the cheque at the Newcastle branch of the bank where Miss C had an account. He did this on a Monday morning.

That Thursday, Miss C went into a branch of her bank near her office in Watford and asked to withdraw £3,000. The cashier checked Miss C's account and gave her the money.

The next day, Miss C's bank discovered that the cheque for £3,000 had bounced, so it debited her account. Before Mr P had paid in the £3,000 cheque, the balance of her account had been just £10, so she was now £2,990 overdrawn. The bank asked Miss C to pay the money back, but she refused. She said it shouldn't have let her take the money out in the first place. When the bank rejected Miss C's complaint about this, she came to us.

complaint rejected
The bank said that the cheque had come back "in the ordinary course of business" and that by withdrawing the money, Miss C had taken a risk that the cheque might bounce. So it refused her demand that it should credit her account with the £3,000.

Miss C said she could not pay the money back as she had already handed over the £3,000 to Mr P in cash. She said she had only cashed the cheque to help Mr P, and that she was now unable to contact him. She said he had needed the money to visit his sick father who lived abroad.

When we looked further into the complaint, it came to light that there was more to the relationship between Miss C and Mr P than first met the eye. In addition, it appeared that Miss C understood in some detail how the clearing system operated, as she used to work in a bank.

We wrote an informal letter to Miss C explaining that we were unlikely to uphold her complaint. She didn't respond. In fact, we haven't heard from her since.

cheque lost in clearing - bank discovers mistake after crediting customer's account - whether it was right for the bank to take the money back

Mrs L owned a flat on the Sussex coast, which she rented out. Each month, her tenant, Mr T, sent her a rent cheque for £900. In February last year, Mrs L paid Mr T's monthly cheque into her bank account as normal and the bank credited her account with the money.

However, five months later, the bank told her that the cheque she had paid into her account in February had been "lost in clearing". The bank said Mrs L should ask Mr T to "stop" the original cheque and write her a replacement. But Mrs L was unable to do this - Mr T had moved out of the flat in May to return home to New Zealand and she had no forwarding address for him.

Mrs L had not kept a copy of the cheque, and she couldn't remember which bank Mr T had held an account with. She explained this to her bank, but after a lengthy discussion that resulted in an unhappy stand-off, the bank went ahead and debited the money from her account. She complained about this, but the bank said it had "dismissed" her case, so Mrs L came to us.

complaint upheld
When we contacted the bank, it agreed that Mrs L had paid the cheque in - she had a receipt for the "paying in" slip and the bank had credited the money to her account. However, it said that since Mr T could not be traced, it was entitled to debit Mrs L's account.

Banks tend to take microfilm pictures of cheques for their records. But in this case, the cheque had been lost before the bank could do this, so it had no details of where Mr T had his account. We suggested to the bank that, even though it had no information about the missing cheque, it was likely that Mr T's other rent cheques to Mrs L had been drawn on the same account. The bank checked its records and was able to discover where Mr T banked.

Mr T's bank confirmed that it would have paid the £900 from Mr T's account if it had been presented with the cheque in February. But it was unable to help track down Mr T because he had closed his account when he moved abroad.

Since the bank had lost the cheque in the clearing process and Mrs L did not have a reasonable prospect of getting the money from Mr T, we decided the bank should reimburse her. We also told it to pay Mrs L an additional amount to compensate her for the distress and inconvenience it had caused. This was because it had initially dismissed her complaint without considering it properly.

Walter Merricks, chief ombudsman

ombudsman news issue 34 [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.