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ombudsman news

issue 53

May 2006

banking update - cheque clearing problems

In issue 34 of ombudsman news (January 2004) we gave a basic explanation of the cheque clearance system, and outlined some of the difficulties that can arise when customers ask their bank or building society whether a cheque paid into their account has "cleared".

What customers often mean when they ask if a cheque has cleared ("is there any danger of the cheque still coming back unpaid-") can differ substantially from what the cashier thinks they are asking ("will you let me draw money on the cheque-"). This misunderstanding can create problems, especially if a customer intends to do something irrevocable – such as paying out money, or releasing goods – on the basis of what the cashier says.

The situation has been highlighted recently by the small number of cases we are starting to see involving an increasingly common cheque ‘scam’. The customer advertises something for sale (typically a car) and then receives an e-mail from a fraudster, posing as a buyer. The fraudster arranges to send a cheque for the cost of the item, together with an extra amount which the customer is asked to pass on to a third party (usually by money courier or direct transfer). Often the fraudster says this extra amount is to cover "shipping costs". The cheque that the customer receives is generally drawn on a business, such as an insurance company.

Before passing on the money to the third party, the customer will normally check with their bank or building society to see whether the cheque has cleared. The point at which the customer makes this enquiry will usually coincide with the point at which their bank or building society will allow money to be drawn against the cheque. The customer will not usually realise that – at that stage – there is still no certainty the cheque will actually be paid by the bank on which it was drawn.

Once the customer has sent the surplus money to the third party, the fraudster will ask for the rest of the money back – saying they have had second thoughts about the purchase. By this point, the cheque that the customer paid in will normally have been returned unpaid. The customer will then discover that the transaction had never been genuine and that the cheque they were sent had originally been stolen. Even though the customer does not return any more money – they are already out-of-pocket by the amount they have sent to the third party.

A dispute often then arises between bank and customer about what the branch did (or did not) say about the risk that the cheque would not be paid. When unresolved disputes are referred to us, we have to decide what the customer probably asked, and what the cashier probably said. As the bank or building society is the banking professional in the relationship, we generally expect it to have been more aware than the customer of the underlying issues, including the possible subtext to a customer’s query about whether a cheque has cleared.

Sometimes we think it should have been evident, from what the customer asked, that they needed to know for sure if there was any chance of the cheque not being paid. If the bank or building society then failed to address that point, we may find in the customer’s favour. In such cases the bank or building society will have to bear the loss.

If the customer’s questions were less clear, we take account of what the bank or building society knew about the cheque transaction. If it had been told of the circumstances in which the customer obtained the cheque, then (given the widespread knowledge within the industry about this type of scam) we might expect it to have warned the customer – even if the customer’s enquiries about the cheque were of a more general nature.

In some – less usual – cases, the circumstances under which the customer obtained the cheque were so obviously fraudulent that we decide the customer could not reasonably have been unaware of this. In these cases, we may say the customer should bear the loss.

The facts and circumstances are different in each case, even though the scam itself is usually carried out in a similar way. As always, we reach a decision on the basis of what happened in each individual case. If there is a dispute about the facts, our decision is based on what we think is most likely to have happened.

case studies

banking update - cheque clearing problems

bank confirms to customer that cheque has "cleared" – should it then have debited customer’s account when cheque was returned unpaid-

Mr H was sent a cheque for £4,400 (drawn on an insurance company) for a car he was selling over the internet. The price of the car was only £500 but the "buyer" asked Mr H to transfer the remainder of the money to a third party living abroad.

When Mr H paid the cheque into his bank he obtained a receipt, on which the cashier had noted the day on which the "funds will be available". Mr H later told us he had contacted the bank on that date for confirmation that the cheque had " cleared".

Mr H then withdrew £3,900 from his account and transferred it to the third party. It was only when the cheque for £4,400 was subsequently returned to his bank – unpaid – that Mr H realised he had been duped. He complained to the bank, saying it was at fault for telling him the cheque had cleared and it was safe for him to draw on it.

When the bank refused to uphold his complaint, Mr H came to us.

complaint rejected
We did not accept Mr H’s assertion that the wording of the receipt was an assurance that it would be "safe" for him to draw on the cheque on the given date. The terms and conditions of Mr H’s account made it very clear that, even though he had been told he could draw against a cheque paid into his account, the cheque could still be debited to his account if it was later returned unpaid.

We were not persuaded, either, by Mr H’s insistence that the bank’s response to his subsequent telephone enquiry constituted an assurance about the fate of the cheque. He admitted he had not explained the circumstances to the cashier but had simply asked if the cheque had cleared. We sympathised with Mr H’s plight, but we could not uphold his complaint.

bank confirms to customer that cheque has cleared – whether it should then have debited customer’s account when cheque was returned unpaid

Mr E advertised a motorcycle for sale at £3,000. An overseas "buyer" responded and sent Mr E a cheque for £6,000, asking him to pass on the extra £3,000 to a third party. The "buyer" said the extra money "represented shipping costs".

Mr E paid the cheque into his bank. But before drawing out and dispatching the "shipping costs", he made two separate enquiries about whether the cheque had cleared. Reassured by the firm’s response to his second enquiry, Mr E sent the money.

Not long afterwards, the cheque was returned unpaid and Mr E realised he had been duped. He complained to the firm, saying it should not have debited his account by the amount of the returned cheque. However, the firm refused to uphold his complaint, so he came to us.

complaint upheld
We examined transcripts of the telephone conversations Mr E had with his bank before he drew on the cheque. The first conversation – held not long after the cheque had been paid in – was general in nature and gave no specific information about the cheque in question.

But the second conversation was different. We felt the bank had failed to pick up on clear signs that Mr E was not just asking if he could draw on the cheque. He was really asking if there was any danger of the cheque being returned unpaid. In the context of what Mr E was asking, we felt it reasonable for him to have construed the bank’s assurances that the cheque had cleared as meaning it was safe for him to draw on the cheque and send off the shipping costs.

Mr E could see, with the benefit of hindsight, that there were some unusual aspects to this transaction. But we did not consider that his dealings with the "buyer" were such that he should have been aware he was dealing with a fraudster. We upheld his complaint and said the bank should cover the £3,000 loss.

on mistaken assumption that a payment was made by CHAPS – not by cheque – customers say bank should not have debited account when cheque was returned unpaid

Mr and Mrs L ran a small business and received an order for goods worth £6,700. This was a much larger order than they were used to handling, so they asked their bank about the safest way to obtain payment for the goods. The bank advised them that an electronic transfer of funds by the "CHAPS" system would be safest because - once made - the payment could not be cancelled.

Mr and Mrs L asked their "buyer" to make the payment by CHAPS. They told us that they later checked the balance of their account online, and found it showed a "cleared balance" that included the £6,700 they had been expecting.

Before allowing the "buyer" to pick up the goods, Mr and Mrs L called the bank to check that it was indeed true that CHAPS payments could not be taken back once made. The bank confirmed this was the case.

A few weeks later, Mr and Mrs L discovered that their account had been debited by £6,700. The "buyer" had paid with a stolen cheque – not by CHAPS – and the cheque had been returned unpaid.

complaint rejected
We checked out the information that customers were given when looking at their account balance online. This stated that the "cleared balance" was subject to adjustment if any items were subsequently returned unpaid.

We accepted that Mr and Mrs L had received two assurances from the bank that CHAPS payments could not later be withdrawn. That information was correct. Unfortunately, even by their own account Mr and Mrs L had not asked about any specific transaction – they had simply asked a general question about CHAPS payments. The bank did not know the couple were intending to release goods on the basis of what it told them, and in the mistaken assumption that they had received a CHAPS payment.

So although we sympathised with Mr and Mrs L, we could not fairly find that the bank should bear their loss from the stolen cheque.

Photo: Walter Merricks

ombudsman news issue 53 [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.