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Law of Bank Payments
II. ELECTRONIC FUNDS TRANSFER
There are two categories of electronic funds transfer ("EFT") systems: non-consumer-
activated systems and consumer-activated systems.81
Non-consumer-activated EFT systems
are those systems designed to be used by banks and certain other financial institutions for the
inter-bank transfer of funds. In some cases, the bank's corporate or institutional customers are
given direct access to these systems. By contrast, the bank's consumer customers, i.e. its
personal account holders, do not have direct access to these systems. The main non-
consumer-activated EFT systems operating in the United Kingdom are the services operated
by BACS Ltd ("BACS") and the payment systems run by the CHAPS Clearing Company Ltd,
called CHAPS and Faster Payments. TARGET 2 is the Eurosystem mechanism enabling
participants to move funds throughout the EU in real time. Inter-bank Euro payments can also
be made using a variety of other means, including the EBA Clearing's clearing and settlement
systems.82
All these systems are considered in this section of the Chapter together with the
new continuous linked settlement (CLS) foreign exchange real-time system which came into
operation in September 2002. The messaging system operated by SWIFT (the Society for
World-wide Interbank Telecommunications) which is often used to send payment instructions
between banks is considered at para.3-008 above.
Consumer-activated EFT systems have been developed to give the bank's consumer
customers direct and easier access to their funds. Examples of consumer-activated EFT
systems include the use of automated teller machines, the electronic transfer of funds initiated
from point-of-sale terminals, electronic pre-payment cards, teleshopping and home banking.
Almost all of these systems are activated through the use of a plastic card, together with a
personal identification number and are considered with other card payment systems in
Chapter 4. Internet payments are dealt with in Chapter 5.
We here deal with:
(1) BACS;
(2) CHAPS;
(3) Faster payments;
(4) CLS (continuous linked settlement);
(5) TARGET2;
(6) EURO1, STEP1 AND STEP2; and
(7) SEPA credit transfers and debits
(1) BACS83
BACS operates an automated clearing house which provides bulk electronic clearing for
sterling credit and debit transfers, especially standing orders and direct debits.84
Typically,
BACS deals with high volume, but low-value, transfers of funds. It is commonly used for the
81
Saxby (ed.), Encyclopedia of Information Technology Law (London: Sweet and Maxwell, 1990) Ch.5.
Alternatively, EFT systems may be classified according to whether they are wholesale (large-value) or retail
(low-value), whether they involve same-day clearing or multi-day clearing, and whether they are net or gross. 82
The EBA's Euro clearing and settlement system is a same-day value, but end-of-day net settlement system. It
is considered in detail at paras 3-045 to 3-048, below. 83
See generally BPSL Innovation Working Group Report (OFT, May 2005. OFT789b), a comprehensive report
by the Payment Systems Task Force. chaired by the OFT (see para.7-067) on the BACS system; also BACS
Access and Governance Working Group Report (OFT, March 2006, OFT836), a report prepared by the OFT on
the governance of BACS. 84
On January 4, 1999 BACS introduced a service for Euro denominated credits (there is no BACS service for
Euro direct debits). Items remain in their original currency as they pass through the BACS system, with the
receiving bank making the conversion where the receiving account is held on a different currency.
Law of Bank Payments
payment of salaries, wages, dividends and pensions, and the collection of regular payments,
such as utility bills, VAT payments, credit card payments, insurance premiums and mortgage
repayments.
The two main services provided by BACS are BACS direct credits, and direct debits.
BACS direct credits are payments which are initiated by the payer, as compared to direct
debits which are initiated by the payee.
The first clearing system in the United Kingdom based on the electronic transfer of funds
was established in 1968. It was run by the Inter-Bank Computer Bureau until 1971 when a
separate company, the Bankers' Automated Clearing Services Limited, took over the
operation. In 1986, following the recommendations of the Child Committee, the company
changed its name to BACS Limited ("BACS"). In 2004 BACS Limited separated into two
companies: a company responsible for the provision and development of services which
adopted the name BACS Payments Schemes Limited, and a company to operate the
infrastructure, which retains the name BACS. BACS later became Voca Limited, and is now
called VocaLink Limited (VocaLink), a company which is owned by 18 banks and building
societies.85
VocaLink also provides the infrastructure for other payment systems including
debit card and ATM payments, and Faster Payments.
There are currently 15 BACS member banks and building societies.86
Each member has
direct access to the BACS system and will supply BACS with credit and debit instructions as
computer data ("input data") for processing. Members may also sponsor their non-personal
customers (i.e. non-member banks and building societies, and corporate customers) to submit
their own input data to BACS, either directly or through a computer bureau. However,
sponsored customers remain the responsibility of their sponsor and any transfer which they
initiate must still be processed by the sponsoring member.
The rules governing the operation of the system are set out in procedural manuals, called
BACS Users Manuals, and in various extensive agreements reached between the BACS
members themselves.
In 2009, BACS processed some 5.6 billion individual payments, of which some 56 per
cent were direct debits, 40 per cent were direct credits and 0.2 per cent were standing orders.
Direct credits and standing orders accounted for some 77 per cent by value of all BACS
payments, and direct debits for some 23 per cent.87
On average more than 22 million
instructions are dealt with each day. Approximately 115,000 businesses use BACS payments.
The main criticism of BACS has been that payment takes three days. The overall volume
of BACS transactions remained static in 2009 compared to 2008 because of the increasing
use of the Faster Payments system which offers a near real time alternative for low value
payments.
(a) The BACS payment cycle
The BACS payment cycle currently takes three working days.88
Day "T" - input day (the day that a BACS transaction is initiated) Transactions
submitted to BACS by 22:30 Monday to Friday are validated by VocaLink to ensure they
meet technical requirements and are processed overnight. This is when the sorting of payment
information between collecting and paying accounts occurs. However, BACS has a data
storage facility so that non-urgent credit and debit instructions can be despatched to BACS by
85
http://www.vocalink.com [Accessed August 26, 2010]. 86
In 2010: http://www.bacs.co.uk [Accessed August 26, 2010]. 87
Annual Summary of Payment Clearing Statistics, 2009 (Payments Council, January 2010). 88
This description is largely based on BPSL Innovation Working Group Report (OFT, May 2005, OFT789b),
Appendices, p.107.
Law of Bank Payments
members and their sponsored customers up to 71 days in advance of the required payment
date.
Day T +1 - processing day
The sorted payment information is sent by VocaLink to member banks by 06.00. Member
banks also receive reports confirming their submissions. Member banks process the payment
data so that payments are ready for overnight posting to their customers' accounts. VocaLink
net the totals of payments due to and from each member bank to produce single multilateral
net amounts and transmits these net amounts to the Bank of England for settlement the
following day.
Day T +2 - entry day
Direct debits, direct credits and balancing entries are applied to accounts as cleared funds,
(i.e. without the risk of repayment because the payer has insufficient funds). The precise time
when accounting entries are posted to customer accounts is a matter for individual banks,
although typically customers' accounts are credited and debited with the relevant payments by
09.30. Banks generally pay interest (where this is offered as part of the bank account) from
this day. Unapplied and unpaid transactions are normally returned on this day. The net values
of payments are settled over the member banks' accounts at the Bank of England. This occurs
at 09.30 each day by posting multilateral net amounts directly to members' settlement
accounts using the Bank of England real-time gross settlement processor.89
Users submit electronic files of payment instructions to BACS either via their own bank,
or using an internet-based service known as BACSTEL-IP which provide a secure channel
for the submission of input data to BACS by its members and sponsored customers and
enables them to receive reports electronically as well as maintain their information online.90
BACS is an immediate payment system in the sense that debiting of the payer's account
and crediting of the payee's account occur simultaneously at the start of business on Day 3 of
the payment cycle. However BACS is not a true immediate electronic funds transfer system
because the order to pay, or collect, must be made at least two days before the payment date.
(b) BACS direct credits
The following example illustrates a series of credit transfers being made using the BACS
system. Redbrick University banks at the X branch of A Bank in Oxford. The University
wants to pay its staff by direct credit transfer into their bank accounts. Half the staff bank at
the Y branch of B Bank in Headington and the other half bank at the Z branch of C Bank in
Banbury. A Bank, B Bank and C Bank are all members of BACS and the University is a
sponsored customer of A Bank. The University prepares a file of payments setting out details
of the amount of each salary payment, the identity of the payee, his bank, branch and account
number. This data, together with instructions to credit the bank accounts of the listed
employees and to debit the University's account, is then transmitted to BACS using
BACSTEL-IP. Computers at the BACS processing centre sort the items so that all those
relating to the customers of A bank are transferred to an output file for transmission to that
bank and all items for customers of B bank and C Bank are put onto output files for each of
those banks. The files are then transmitted via BACSTEL-IP to the central computer centres
of A Bank, B Bank and C Bank, where the items are grouped by branch and transmitted to the
appropriate branches. A credit transfer through BACS is illustrated in Figure 3.7.
Where direct credit payment instructions are submitted directly to the infrastructure
89
Red Book, p.411. 90
APACS Annual Review 2002, p.13.
Law of Bank Payments
provider, VocaLink (as is the case with many corporate users) the payment value is not
debited from the payer's bank account until Day T + 2; i.e. the same day that cleared funds
are received in the beneficiary's account. Where direct credit payment instructions are
submitted by a bank, the timing of when the payer is debited depends on the bank and service
offered. Generally, for consumers and small businesses this occurs at T.
Standing order payments are submitted to VocaLink by banks (although many standing
orders are now executed using Faster payments). Generally, though not in all cases, banks
debit the payer's account on Day T to ensure funds are available for settlement on Day T + 2.
Whether interest is paid on the payment amount for the two days between day T and T + 2
depends on the individual bank.
A standing order or direct credit can be recalled by the remitting or sponsoring bank
respectively (e.g. on behalf of the payer or payee). The recall request must be completed by
15.30 on Day T + 1 of the processing cycle. Some banks may impose an earlier cut-off time.
A timely recall instruction will result in either the credit being stopped prior to reaching the
beneficiary's account, or reversed from the account upon receipt; this depends on the timing
of the request and individual bank processes for handling recalls. The payer's/originator's
account is reimbursed in full, subject to any charge levied by the remitting/sponsoring bank
for the cancellation service.
BACS introduced a direct credit Euro service with the launch of the new currency in 1999.
Payment files may be submitted in Euros or Euros and sterling. The receiving bank carries
out all necessary currency conversion.91
(c) BACS direct debits
It has already been noted that the important distinction between credit and debit transfers is
that whereas a credit transfer is initiated by the payer and involves a "push" of funds from his
account into the payee's account, a debit transfer is initiated by the payee pursuant to the
payer's authority and involves a "pull" of funds from the payer's account into the payee's
account. In the case of a direct debit, the payer's bank must receive prior authorisation from
its customer, the payer, before it will execute a debit instruction received from the payee.
The procedure for the collection of direct debits using BACS is similar to that for the
payment of credit transfers. For example, if Redbrick University wanted to collect covenant
payments from its alumni using direct debits, it would supply BACS with data identifying the
amounts and bank accounts to be debited. BACS would then process the data and transmit
debit instructions to the banks of the various alumni. This process is illustrated by Figure 3.8.
The direct debit scheme operated by the major UK banks and building societies uses
BACS for processing. The scheme is governed by its own set of rules.92
An organisation
which wants to collect payments under the direct debiting scheme ("the originator") must be
sponsored by one of the banks or building societies which operate the scheme ("the
sponsor").93
91
BPSL Innovation Working Group Report (OFT, May 2005, OFT789b), p.24. 92
The Originator's Guide and Rules of the Direct Debit Scheme (Version 2.0, Nov. 2003) (hereafter "Guide &
Rules"). 93
Guide & Rules, para.2.1. It is also possible for an "agency bank" to nominate their customers to participate in
the scheme by being sponsored by one of the sponsoring banks. An agency bank is a bank participating in the
scheme which is not a sponsor itself, but which has a nomination arrangement with a sponsoring bank. Where an
agency bank nominates a customer as an originator, the agency bank must provide the sponsor with an
indemnity for that customer.
Law of Bank Payments
Sponsorship is dependent on the sponsor being satisfied as to the contractual capacity,
financial status and administrative capability of the originator.94
The originator must also
have a registered address in the United Kingdom and a UK sterling bank account.95
Furthermore, before being accepted into the scheme, the originator must provide all banks
and building societies operating the scheme with an indemnity against any loss, including
consequential loss, that may be caused to them, unless the loss was due to the bank or
building society's own fault.96
Once accepted into the scheme, the originator must provide the branch of the payer's bank
which holds the payer's account with an authority from the payer authorising the collection of
direct debits from his account. The payer's authority is called the "Direct Debit Instruction"
("DDI"). The originator must submit a DDI to the payer for completion. The DDI must
follow a standard format and must include such information as the originator's name and
address, the originator's identification number, the heading "Instruction to your Bank or
Building Society to pay Direct Debits", the name and address of the bank branch where the
payer's account is held, the name of the account holder, the sort code of the payer's branch,
his account number, the date and the account holder's signature. All DDIs used under the
direct debit scheme must be variable in terms of amount, date and frequency.97
Paperless
direct debits have now been introduced, and it is possible for a payer to sign up to a paperless
direct debit on the telephone, through the internet and interactive television.98
When the DDI is completed and signed by the payer it must be returned to the originator,
who lodges the DDI with the payer's bank.99
Lodgment can occur through the physical
deposit of the DDI with the payer's bank, although it is increasingly common for the
originator to keep the DDI itself and electronically transmit details of the DDI to the payer's
bank using a scheme called AUDDIS (Automated Direct Debit Instruction Service) operated
by BACS.100
It became mandatory for new business users to use AUDDIS from January
2008.101
The DDI must be lodged with the payer's bank at least 10 working days before the
first direct debit is collected.102
The originator must also give the payer at least 10 working
days' notice103
(unless a shorter period of notice has been agreed) of the amount and date of
the first direct debit and of any subsequent change to the amount and date of the direct
debit.104
The originator must then collect the direct debit payment on or within three working
days after the specified due date as advised to the payer; failure to do so results in the
originator having to give the payer further notice of the new collection date.105
Collection of
the direct debit payment is through BACS. As BACS operates on a payment cycle
94
Guide & Rules, para.2.1. 95
Guide & Rules, para.2.1. 96
Guide & Rules, para.2.4. 97
Guide & Rules, para.3.1. Although the originator may indicate in its "official use box" the dates on which
payments are intended to be made, the contents of this box will not be read or monitored by the payer's bank. 98
BPSL Innovation Working Group Report, (OFT, May 2005,OFT789b), p.24. 99
Guide & Rules, para.3.6. A DDI can only be lodged with the payer's bank by the originator and not directly by
the payer himself. 100
See, generally, Guide & Rules, paras 15.0-15.20. The originator must provide a copy of the DDI to the
payer's bank within seven working days if requested to do so (ibid. para.15.11) 101
BACS Annual Review 2008. 102
Guide & Rules, para.5.4. 103
Plus postal time. 104
Guide & Rules, para.4.2. 105
Guide & Rules, para.4.2.
Law of Bank Payments
of three working days,106
the originator must submit an input file to BACS at least two
working days before due date of the direct debit payment. The payer's account is debited and
the originator's account is credited simultaneously on the third day (T + 2) of the processing
cycle.
The payer's bank is authorised to make payment against a direct debit processed by BACS
only where the direct debit complies with the terms of the payer's authority (i.e. his DDI).
However, the payer’s bank may refuse to pay the direct debit for various reasons, for example
through lack of funds or the payer's countermand of his authority.107
The originator is usually
advised of the unpaid direct debit and the reason for this by the payer's bank through an
automated system called ARUDD (Automated Return of Unpaid Direct Debits) operated by
BACS. Exceptionally, the payer's bank may advise the originator of the return of the unpaid
direct debit directly by post. An unpaid direct debit may be re-presented for payment within
one month of the date on which first presentation was made.108
The payer may amend or
cancel his authority at any time by informing his branch of his bank. The originator will be
advised of this by the payer's bank in writing, or, as is more usual, through an automated
system called ADDACS (Automated Direct Debit Amendment and Cancellation Service)
operated by BACS.109
Under the terms of the direct debit scheme, the payer is guaranteed a full and immediate
refund from his bank should there be an error in the direct debiting process by the originator
or the payer's own bank.110
This would apply, for example, where a direct debit was made
from the payer's account after he had cancelled his authority, or where more than the notified
sum was debited from his account, or the debit was made on the wrong date.111
Where the
error is due to the fault of the originator, the payer's bank can claim a refund from the payee's
bank, which in turn claims from the payee under the terms of its indemnity.112
The indemnity
must be settled within 14 days of receipt.113
However, no claim can be made under the
indemnity where the error is due to the fault of the payer's bank itself.
It is not possible within the BACS system for a payee to revoke an individual item within a
submitted direct debit file. However, a payee can request that a whole direct debit file is
extracted up to 22.30 on Day T. This ensures that none of the direct debits are delivered to the
destination banks. Requests received after 22.30 on Day T are considered by the payee's
sponsoring bank, which can authorise BACS to reverse the file up to T + 7, such that payer's
accounts are refunded up to T + 9.
(2) CHAPS
The Clearing House Automated Payment System, better known as CHAPS, is a system for
making virtually immediate (real time) payments, in sterling. There are no minimum or
maximum limits on the amount of a CHAPS transfer. Although low value (retail) payments
do pass through the system, CHAPS is most frequently used for high-value sterling
transactions (particularly since the introduction of Faster Payment). The online electronic
operation of CHAPS means that funds can be between settlement banks almost immediately
(if liquidity is available). How quickly funds move between the accounts of payers and payee
106
See para.3-028, above. 107
See, generally, Guide & Rules, paras 8.0-8.7. 108
Guide & Rules, para.9.3. 109
See, generally, Guide & Rules, paras 10.0-10.8. 110
Guide & Rules, para.3.3. The payer will have been given notice of the guarantee by the originator, either on
the DDI form submitted to the payer for completion, or when the originator gave the payer advance notice of the
amount and date of payment of the first debit, or by other correspondence. 111
CHAPS Rules (Version 2.0), 2009, r.1.5. 112
See, generally, Guide & Rules, paras 11.0-11.10. 113
Guide & Rules, para.11.5.
Law of Bank Payments
depends on the arrangements settlement banks have with the payer and payee, or their banks.
In some cases, transfers between the payer and payee can also be almost immediate (an
arrangement known as straight through processing). It is this feature which also distinguishes
CHAPS from BACS, as a BACS payment instruction must be made at least two days before
the payment date.
CHAPS is the dominant cashless transfer system in the United Kingdom in terms of value.
In 2009, 32 million sterling transactions, with a value of some £64,616,956 million passed
through the system.114
CHAPS is run by the CHAPS Clearing Co Ltd.115
The operations of the CHAPS Clearing
Co Ltd are overseen by the Payments Council (see generally para.7-046) with which CHAPS
Clearing Co Ltd has entered into a contract, under which it is responsible, among other
things, for the development of CHAPS in a manner consistent with the objectives and
decisions of the Payments Council, and for using its best endeavours to procure the
compliance of its members with any decision of the Payments Council affecting CHAPS.
CHAPS started operation as a same-day value electronic sterling credit transfer system on
February 9, 1984. On April 22, 1996, CHAPS changed from being a same-day system,
subject to end of day multilateral net settlement, to become a real-time gross settlement
(RTGS) system. On January 4, 1999, CHAPS became able to handle Euro, as well as sterling,
credit transfers under two systems: CHAPS Sterling and CHAPS Euro. On August 27-28,
2001 CHAPS Sterling and CHAPS Euro were consolidated into a new dual-currency RTGS
system (originally called NewCHAPS). However, in 2008 the CHAPS Euro system was
terminated following the decision of the Bank of England not to join TARGET2, and
alternative methods of transferring Euros now exist CHAPS uses the SWIFT technical
infrastructure and is governed by the CHAPS Rules.116
All payments made through the
system are denominated in sterling and settled on an individual basis in real time across the
relevant members' settlement accounts.117
Membership of CHAPS is open to any financial institution that (a) holds a sterling and/or a
Euro settlement account at the Bank of England which the Bank of England has agreed may
be used for the purposes of settling CHAPS payment obligations; (b) has the ability to
comply on a continuous basis with the technical and operational requirements of the CHAPS
systems (c) is a shareholder of CHAPS Clearing Co Ltd; and (d) pays the appropriate entry
fee.118
There are currently seventeen settlement members of CHAPS Sterling: they are all
banks.119
(a) Detailed operation of CHAPS
The main features of the operation of CHAPS are these:
(1) Settlement members, CHAPS and the Bank of England use SWIFT messages and
systems to communicate.
(2) Every payment is settled across the payer's bank's and the payee's bank's accounts at
the Bank of England before any payment notification is sent to the payee's bank.
(3) The paying settlement member acting in a principal capacity sends a SWIFT message
to the receiving settlement member (within a specified group of recipients, known as a closed
user group, or CUG).
114
Annual Summary of Payment Clearing Statistics, 2009, Payments Council, January 2010. 115
Formerly called the CHAPS and Town Clearly Company Limited until the closure of the Town Clearing
system. 116
CHAPS Rules (Version 2.0), 2009, r.1.3.1. 117
CHAPS Rules (Version 2.0), 2009, r.1.3.2. 118
CHAPS Rules (Version 2.0), 2009, r.1.4. 119
In 2010: http://www.chapsco.co.uk.
Law of Bank Payments
(4) A SWIFT proprietary process holds the message and strips off an extract containing
essential details which is sent to the Bank of England RTGS system.
(5) If there are sufficient funds in the paying settlement member's RTGS account at the
Bank of England, the payment is settled by the Bank of England by debiting the paying
settlement member's account and crediting the receiving settlement member's account.
(6) Once the Bank of England system responds to SWIFT acknowledging that the
relevant funds have been transferred between the two Bank of England accounts, the SWIFT
system releases the original message to the receiving settlement member.
In addition, the following details may be added to that summary:
(1) Customers may use a variety of means to instruct their branch to issue a CHAPS
Sterling payment message, e.g. by telephone, telex or in writing. Some companies use
proprietary electronic systems or SWIFT. It may be expected that the remitting branch will be
provided with the account details of the Ordering Customer, the Beneficiary Customer name,
account number and details of the bank and branch where the funds are to be transferred.
(2) Communications between settlement members use the SWIFT network. Each
settlement member has its own internal system which enables the settlement member's
branches to access its payment processing system. Each CHAPS Sterling payment message is
settled across members' accounts at the Bank of England before full payment data is sent to
the receiving bank.120
The SWIFT Y-Copy service ensures that a settlement request derived
from each payment message received by the CHAPS Sterling Closed User Group is sent
initially to the Bank of England. If there are sufficient funds in the sending member bank's
account,121
the Bank of England settles the transaction by debiting the sending member bank's
account and crediting the receiving member bank's account in the same amount. Thereafter a
form of confirmation is added to the full message stored by the SWIFT Y-Copy service is
related to the receiving settlement member. On receipt of the full payment message, the
receiving bank has the assurance that the relevant funds have been credited to its settlement
account. Figure 3.9 illustrates how the CHAPS Sterling system operates.122
(3) For each payment message, settlement takes place in real time against sufficient funds
in the sending bank's account. To lubricate this process, settlement members prime their
settlement accounts with liquidity prior to the start of the day. The Bank of England facilitates
this process by providing the CHAPS banks with intraday liquidity so that they can maintain
an even flow of funds through the system. This is achieved by purchasing from the settlement
banks certain high-quality assets under sale and repurchase agreements. Incoming funds also
provide liquidity. In the unlikely event of gridlock,123
a circles processing facility has been
developed which allows the simultaneous settlement of payments queued on behalf of
different banks which would largely set off each other.124
120
This may be the payee's bank itself, but where the payee's bank is not a settlement member the receiving bank
will be a settlement member employed by the payee's bank to act as its agent. 121
The sending bank may be the payer's bank or some other bank acting as a correspondent of the payer's bank. 122
This diagram is adapted from one which appears in the Office of Fair Trading Report, UK Payment Systems
(May 2003), p.160. See also A Guide to the Bank of England's Real Time Gross Settlement System, Bank of
England (May 2010). 123
In a gross settlement system gridlock can occur when one or more direct members either, defer the
performance of their settlements until such time as they have received sufficient credits from their bilateral
counterparts within the system, or, sufficient overall liquidity is not made available, thereby preventing the
system from starting or continuing to work. See M. Giovanoli, "Legal Issues Regarding Payment and Netting
Systems" in J. Norton, C. Reed and I. Walden (eds) Cross-Border Electronic Banking 1st edn (London: LLP,
1995). p.224. 124
Becher, Galbiati and Tudela, The Timing and Funding of CHAPS Sterling Payments, FRBNY Economic
Policy Review, September 2008.
Law of Bank Payments
(4) CHAPS provides a central scheduling and queue management facility for CHAPS
members at the Bank of England. A CHAPS settlement request is received by the central
scheduler from a CHAPS member. The central scheduler enables members to prioritise
payments, hold individual payments, or schedule payments by value and/or counterparty, so
long as that counterparty is also a CHAPS member. However many banks prefer to control
the release of instructions to the Bank of England instead.125
(5) Payments are released from the central scheduler to the RTGS settlement process.
There payment requests are either queued awaiting funds or settled immediately if funds are
available. Banks are able to allocate a priority to a payment, which determines the queuing
order once payments are forwarded to the RTGS processor. Nevertheless, the bank may
amend that priority or cancel the payment at any time up to settlement. Banks are even able to
reserve part of their liquidity to enable urgent payments to be settled without waiting for the
arrival of funds from other CHAPS members.
(6) Banks are able to track the status of individual payments as they progress through the
scheduler and the RTGS settlement process through a computer based enquiry service called
"Enquiry Link".
(7) The CHAPS Rules provide that payments made through CHAPS must be
unconditional,126
and also that a payment message cannot be revoked from the point at which
the members' settlement account is debited.127
Furthermore, each member must give same
day value to all payments denominated in sterling received within a timetable set out by the
CHAPS Clearing Co Ltd.128
It is arguable that the payee who is due to receive such a sterling
125
A guide to the Bank of England's Real Time Gross Settlement System, Bank of England, May 2010, p.12. 126
CHAPS Rules (Version 2.0), r.3.1. 127
CHAPS Rules (Version 2.0), r.3.2.1. When the CHAPS system is operating in RTGS By-Pass mode, the
payment message is considered irrevocable from the point at which the sending member is unconditionally and
irrevocably liable to pay the receiving member the amount specified in the message (r.3.2.2). As to completion
of payment see para.3-130 below. 128
CHAPS Rules (Version 2.0), r.2.2.3.
Law of Bank Payments
payment may have a right of action against his own bank for breach of contract should it fail
to give same day value as provided by the CHAPS Rules.129
(8) In the case of payment instructions given by overseas banks to their UK
correspondents, the instructions will usually be received over SWIFT. Where the UK
correspondent is CHAPS settlement member, it will normally debit the account of the
overseas sender and then use CHAPS in order to make a sterling payment to the beneficiary's
bank or its correspondent.
(9) CHAPS sterling settlement members may also enter into separate contractual
agreements with their corporate or institutional customers (e.g. a bank which is not a
settlement member) allowing them to participate in the CHAPS Sterling system. These
participants are treated like branches of the settlement member and may be linked, via a
computer system or an existing SWIFT connection, to the settlement member's payment
processing system. The participant cannot access the CHAPS system directly, but must
always go through its settlement member. As with all CHAPS payment messages transmitted
through its SWIFT interface, the settlement member acts as a principal, and remains
responsible for the authenticity of any payment message transmitted by the participant.
(3) Faster Payments130
Faster Payments is a system which enables electronic credit payments to be completed to UK
banks within a few hours of sending. Faster Payments was introduced in May 2008,
following work by the Payment Systems Task Force, chaired by the OFT.131
Faster Payments is run by the CHAPS Clearing Co Ltd.132
The operations of the CHAPS
Clearing Co Ltd are overseen by the Payments Council (see generally para.7-046) with which
CHAPS Co Ltd has entered into a contract, under which it is responsible, among other things,
for the development of CHAPS in a manner consistent with the objectives and decisions of
the Payments Council, and for using its best endeavours to procure the compliance of its
members with any decision of the Payments Council affecting CHAPS.
The Faster Payments system is operated by CHAPS. The central network for Faster
Payments is provided by Immediate Payments Limited ("IPL"), a company established by
VocaLink (see para.3-023).
(a) Instruments
The types of payments that can be processed through the Faster Payments Service are:
Single immediate payments. These are typically given on the telephone or through an
Internet banking service, with a request for the transaction to be made straight away.
These types of payment can be made all day, every day.
Forward-dated payments. These are individual, one-off payments set up by a customer
to be made at a future date. A customer may for example, arrange to pay all bills at the
129
By arguing that r.2.2.3 represents the reasonable usage of bankers and as such constitutes an implied term of
the payee's contract with his bank (Hare v Henty) (1861) 10 CBNS 65, 142 ER 374, 379). The payee could not
rely on the Contracts (Rights of Third Parties) Act 1999 to enforce a term of the CHAPS Rules against his bank
as the Act is expressly excluded by the wording of the CHAPS Rules themselves, although this exclusion is
made "without prejudice to any right or remedy of the third party which may exist or be available apart from the
Act" (r.11.1.1). 130
See further para.5-013. 131
BPSL Innovation Working Group Report (OFT, May 2005, OFT789b). Faster payments is described in detail
in Direct Corporate Access user guide, version 1.0 (APACS (Administration) Limited, March 2009) and at
http://www.chapsco.co.ukfaster_payments/ [Accessed August 26, 2010]. This summary is large drawn from
those sources as at August 2010. 132
Formerly called the CHAPS and Town Clearly Company Limited until the closure of the Town Clearing
system.
Law of Bank Payments
beginning of the month, setting the payments up in advance, but having the money
debited on a specified date in the future.
Standing orders are regular payments made on a specific date for the same amount, to
the same person or beneficiary. However, the services offered may differ between banks.
(b) Participation
Users of the Faster Payments Service can participate in a numbers of ways.
Members
Faster Payments Service membership is open to credit institutions with a settlement account
at the Bank of England, and who can connect their payment system to the central
infrastructure 24 hours a day, 7 days a week. Members can send and receive all types of
payments processed through the system, although they will decide which payments are
provided to their customers. Members are responsible for settlement of funds through the
Bank of England and can sponsor other participants into the service that do not wish to have
settlement commitments for the Faster Payments Service. Members are responsible for the
settlement of all payments submitted by participants that they sponsor.
Agencies
Financial institutions who do not want or need to be full members of the Faster Payments
Service, or who do not meet membership criteria can choose to become agency participants.
Agencies are able to send and receive all types of payments processed through the service in
the same way as a member, but they must be sponsored by one or more members who will
provide inter-bank settlement facilities for those payments made and accepted by the agency.
The settlement member is wholly responsible to other settlement members for payments
made by an agency it sponsors.
Third-party beneficiaries
Companies such as credit card issuers can connect to the Faster Payments Service, in order to
be able to receive information regarding payments directly, rather than having them sent via
their bank. Third-party beneficiaries must be sponsored by one or more members who will
provide inter-bank settlement facilities for those payments accepted by the third-party
beneficiary. Currently, about half of all the bill payments made by telephone or by banking
online are to pay a credit card bill.
Corporates
From July 2009 companies have been able to submit files of payments directly into the
system in much the same way as through BACS. For example a company may pay a large
number of employee expenses. Companies are sponsored by a bank that is already either a
member or an agency within the Faster Payments Service.133
Consumers and business customers, as well as financial institutions who do not connect
directly to the Faster Payments Service infrastructure, may make Faster Payments via a bank.
(c) Operation
A customer wishing to make a payment will communicate the payment instruction to his
bank, possibly by telephone or online. Some paying banks may for example restrict
instructions to telephone only. The paying bank will determine whether or not the payment is
eligible to be sent by Faster Payments. With effect from September 6, 2010, the maximum
133
Direct Corporate Access user guide, version 1.0 (APACS (Administration) Limited, March 2009).
Law of Bank Payments
limit is £100,000 per payment, although individual banks may well impose a lower limit.
Individual payments may be processed by the Faster Payments system 24 hours a day,
seven days a week. Standing orders are only processed on bank working days.
The paying member bank sends a message to the Faster Payments network service (called
a Faster Payments switch) run by IPL. From this moment the payment cannot be cancelled.
After ensuring that the payment message is properly formatted, and has all details required,
the Faster Payments switch sends a message confirming the payment instruction to the
receiving member bank and the paying member bank.
The receiving member bank will ensure that the payee account exists and will send a
message to the Faster Payments switch stating whether or not the payment is accepted. If the
payment is accepted the switch will arrange for the amount of the payment to be incorporated
into the relevant net settlement amount. The Faster Payments switch will also send a message
to the paying bank to confirm that payment has been made.
Individual payment messages are sent in accordance with the ISO 8583 standard using a
secure Internet service approved by BACS. Files of payment instructions may also be used.
Where a corporate user or agency bureau has direct access to Faster Payments, the user
will submit payment requests in files to the Faster Payments switch. The user will use a
security key (called public key infrastructure or PKI) in relation to the sending and receipt of
messages, held on a smartcard. The Faster Payments switch sends a message to the sponsor
member for a corporate user. The sponsor must authorise payment before the payment
process may continue.
(4) Continuous Linked Settlement
Continuous Linked Settlement ("CLS") is a foreign exchange real-time gross settlement
system which came into operation in September 2002.134
It is a global financial industry
initiative designed to eliminate Herstatt (settlement) risk that arises from foreign exchange
transactions.135
The system is centred on CLS Bank International, New York ("CLS Bank"), an Edge Act
corporation organised under the laws of the US, and chartered and supervised by the Federal
Reserve. CLS Services Ltd ("CLS Services") is a limited company incorporated under the
laws of England and Wales that provides operational and back office support to CLS Bank
and its affiliate companies. CLS Services is owned by a holding company in Switzerland
which in 2008 was owned by 71 financial institutions as shareholders.136
The CLS system
rules and procedures are governed by English law, and overseen by the countries whose
currencies are settled in CLS.
In addition to 61 CLS Bank Members, there were 9,060 participants using the CLS Bank
service, including 470 banks, corporates and non-bank financial institutions and a further
8,590 investment funds.137
CLS Bank settled an average of 1 million instructions per day,
with an average daily value of some US $4.2 trillion.138
CLS eliminates the main risk that one leg of a foreign exchange transaction would be
settled, and the other would not, by providing for simultaneous settlement on its books of
both legs of a foreign exchange transaction on the basis of payment versus payment ("PVP").
134
Further information about CLS can be found at http://www.cls-services.com [Accessed August 26, 2010].
CLS is described in detail in Progress in reducing foreign exchange settlement risk, Committee on Payment and
Settlement Systems, Bank for International Settlements (May 2008) section 3 and Annex 4, which are heavily
drawn upon in the summary that follows. 135
As to which, see para.3-019, above. 136
Committee on Payment and Settlement Systems, Progress in reducing foreign exchange settlement risk
(Bank for International Settlements, May 2008) Annex 4, p.77. 137
http://www.cls-services.com (August 2010) [Accesses August 26, 2010]. 138
http://www.cls-services.com (May 2010) [Accessed August 26, 2010].
Law of Bank Payments
To enable such multicurrency operations to take place, CLS maintains an account at each of
the central banks whose currencies it settles. The currencies that are currently settled are US
dollar, Euro, sterling, yen, Swiss franc, Canadian dollar, Australian dollar, Swedish krona,
Danish krone, Norwegian krone, Singapore dollar, Hong Kong dollar, New Zealand dollar,
Korean won, South African rand, Israeli shekel and Mexican peso.
CLS Services receives, validates and matches foreign exchange settlement instructions and
determines whether they are eligible for settlement at CLS Bank. On the day prior to the
settlement (value) date, CLS Services transfers all eligible instructions to CLS Bank.
Instructions to be settled by CLS Bank must normally be submitted by 00.00 Central
European Time ("CET") on the day before settlement. Each CLS Bank settlement member
holds an account at CLS Bank that is divided into sub-accounts for each currency that the
settlement member settles. Beginning at 07.00 CET on settlement day, CLS Bank settles
instructions individually on the members' accounts by simultaneously debiting the sub-
account of the currency being sold and crediting the sub-account of the currency being
bought. These debits and credits are final upon execution of the transfers on the books of CLS
Bank. Throughout the day, as instructions are settled, settlement members accumulate net
debit balances in currencies where they and their customers are net sellers and net credit
balances in those where they and their customers are net purchasers.
Financial institutions can make use of CLS in three ways. "Settlement members" are direct
participants, submitting trades to CLS Bank on behalf of themselves and their customers, and
having responsibility for the funding of the amounts needed to settle the trades. "User
members" can also submit trades directly to CLS Bank, but the funding is the responsibility
of a settlement member selected by the user member. Finally, "third parties" (including
entities that are not financial institutions) have no direct relationship with CLS Bank - they
select a settlement or user member to submit trades on their behalf. Where settlement
members themselves are not direct participants in the payment system of a CLS currency,
they use correspondent banks to make and receive payments.
Settlement members are obliged to submit payments to CLS Bank to provide funds in the
correct currencies to cover projected net debit positions. This can be done either by making a
single payment for the full amount at 07.00 CET or a series of payments in hourly
instalments. Settlement members pay the net funds into the relevant central banks. CLS Bank
continuously receives funds from settlement members, settles instructions across its books
and pays out funds to members. CLS makes payouts throughout the settlement day to
settlement members in currencies in which they have a net credit position, subject to the
caveat that the sum of all currency balances (positive and negative) in a settlement members'
account, converted into US dollars, is not negative. By 12.00 CET the pay-ins and pay-outs
are complete. At this time, if there are no problems, all funds will have been disbursed back
to members. In the normal course, settlement members will have zero balances in their CLS
Bank accounts at the end of each settlement day, and CLS Bank will have zero balances in its
central bank accounts.
To execute pay-ins and pay-outs from CLS Bank's central bank accounts, settlement
members and CLS Bank use each central bank's respective real-time gross settlement system
to transfer funds. The whole process of funding and execution takes place during a five-hour
window (07.00 to 12.00 CET) when the opening times of the relevant RTGS systems overlap
and are open to send and receive funds.
CLS Bank has strict settlement criteria. CLS Bank applies these criteria to the queue of
payment instructions waiting to be settled. Failure to comply with these criteria results in the
instructions being returned to the sender at the end of the settlement day.
Law of Bank Payments
(5) Cross border payments in Euros: general
We here set out the background to the development of methods of cross-border and domestic
payment in Euros. Particular methods of payment are then considered in sections (6) to (8).
We also refer to developments in European law which have had a significant impact on funds
transfers.
Since January 1, 1999 the European Central Bank (ECB) has been responsible for
conducting monetary policy for the Euro area (Euro area which consists of the EU countries
that have adopted the Euro).
The Euro area came into being when responsibility for monetary policy was transferred
from the national central banks of 11 EU Member States to the ECB in January 1999. Greece
joined in 2001, Slovenia in 2007, Cyprus and Malta in 2008, and Slovakia in 2009 (see
further para.2-015).
(a) European Central Bank
The Treaty on European Union139
("the TEU") provided for creation of the European Central
Bank, and European System of Central Banks, with powers under the Statute of the European
System of Central Banks and of the European Central Bank ("the ECSB Statute").140
The
ECSB Statute established both the ECB and the European System of Central Banks (ESCB)
as from June 1, 1998. The ECB has legal personality under public international law.
(b) European System of Central Banks
The ESCB comprises the ECB and the national central banks of all EU Member States
(Article 107.1 of the TEU) whether they have adopted the Euro or not. The objectives of the
ESCB include thy promotion of the "smooth operation of payment systems" (art.105.2 TEU).
(c) Eurosystem
Because the ESCB included Member States not in the Euro area, the Eurosystem group was
created which comprises the ECB and the central banks of those Member States that have
adopted the Euro.141
The Eurosystem and ECB are in effect the monetary authority of the
Euro area, and oversee among other things the development of payment systems for the
Euro.142
Eurosystem has developed a real time gross settlement system for the cross border
payment of Euros, now called TARGET2 (see below). Eurosystem is also developing a
system for the settlement of securities within the EU, currently known as TARTGET2-
Securities, or T2S.143
Eurosystem has established a system for the cross border use of
collateral held central banks by counterparties, called the Collated Central Banking Model, or
CCBM, and is currently working on a replacement, called CCBM2 which is intended to be
based on a single platform.144
(d) European Payments Council and SEPA
The European Payments Council ("EPC") is a body established in 2002 by the European
139
[1992] O.J. C191/01,Title II, art.G. 140
Contained in the protocol to the TEU at [1992] O.J. C191/68. 141
The term Eurosystem seems to be a label for the group consisting of the ECB and the Euro area Central
Banks. The term is mentioned in art.282 of the Treaty on the Functioning of the European Union ("TFEU")
[2007] O.J. C306/01. 142
The European Central Bank, The Eurosystem, The European System of Central Banks, ECB and Eurosystem
(2010). 143
T2S (unlike TARGET2) is being designed as a multi-currency system, incorporating non-eurozone central
banks. At the time of writing it is not known if the Bank of England will participate. 144
http://www.ecb.int at Payments and Markets (2010) [Accessed August 26, 2010].
Law of Bank Payments
banking industry to co-ordinate policy in relation to payments.145
In practice, the EBA
concentrates on retail euro payments, in particular SEPA payments. Its members consisted in
2010 of some 76 banks and banking associations in the EU, including the Payments Council
(see para.7-046), Barclays, HSBC, Lloyds TSB, RBS.
In 2001 the EU adopted a regulation which required that charges for cross border
payments in Euros up to €50,000 should be the same as those for payments within a member
state.146
Following that regulation the EPC developed a scheme to establish a single Euro
payments area (SEPA) within which credits and debits in Euros can be transmitted
electronically domestically and across borders (see para.5-008). The EPC also intends to
extend the SEPA to card payments, and payment by mobile telephone.
(e) The European Banking Association and EBA Clearing
The European Banking Association (EBA) was established in 1985 by European banks and
the European Investment Bank to promote the predecessor of the Euro, the ecu. In 1998 the
EBA created the ABE clearing S.A.S. ("EBA Clearing") to operate a new payment systems
for large amounts of Euros, EURO1 (see para.3-063). In 2000 EBA Clearing established a
system for low value payments in Euros, STEP1; and in 2003 it introduced a system for mass
payments in Euros, STEP2.
(f) The European Commission and the Payment Services Directive
In 2007 the EU adopted a directive on payment services, which sets out comprehensive
requirements in relation to the regulation of payment service provides, and the conduct of
business in relation to information provided and the rights and obligations of the parties in
relation to payment (see further paras 1-026 and 5-009). The Directive has been implemented
in the Payment Services Regulations 2009,147
and applies to payments in sterling as well as
Euros, and domestic payments as well as cross-border.
(5) TARGET2 TARGET2 is a system developed by Eurosystem for the payment of Euros between
participant banks in different countries in real time or at by the end of the day, with
immediate settlement (i.e. real time gross settlement or "RTGS"). TARGET2 is the successor
to a system called TARGET (Trans-European Automated Real-time Gross-settlement
Express Transfer) which was originally introduced in 1999 to facilitate transfers of Euros
between participants in different member states using the new currency. Under the TARGET
system, a payment instruction would be directed to, and authorised by an individual national
central bank and transmitted using TARGET to national central bank of the payee.
TARGET2 retains a national structure, but consolidates processing on a Single Shared
Platform (SSP). The SSP is used for RTGS between participants, and some other accounts are
maintained on it. The SSP is effectively partitioned, so that, for example, RTGS accounts of
French participants held in the books of the Banque de France are subject to French law and
jurisdiction, whereas accounts of German participants in the books of Deutsche Bundesbank
are subject to German law and jurisdiction. However, to ensure maximum uniformity, a set of
harmonised terms and conditions have been developed for use by national central banks in
their contracts, with participants for whom they hold accounts.
Another major difference between TARGET1 and TARGET2 is that with one or two
145
http://www.europeanpaymentscouncil.eu [Accessed August 26, 2010]. 146
Regulation 2560/2001 of the European Parliament and Council on cross-border payments in euro [2001] O.J.
L344/13 (now replaced by Regulation 924/2009 on cross-border payments in the Community which extended
the principle to direct debits [2009] O.J. L266/11); see para.5-008, below). 147
SI 2009/209.
Law of Bank Payments
minor exceptions payment messages are transmitted directly between T2 participants by
SWIFT utilising a similar Y-Copy mechanism for settlement as is described above in relation
to CHAPS.
All countries which are members of the Euro participate in TARGET2. In addition, it is
possible for the central banks of other countries to choose to participate, and in 2009 six had
done so.148
The Bank of England does not participate in TARGET2, and for its own
transactions accesses TARGET2 via De Nederlandsche Bank (the Dutch national Bank) to
make and receive Euro payments.149
Commercial banks may participate directly in
TARGET2 by holding an account with a Euro area national bank.
TARGET2 is managed by a governing council, Eurosystem, and the three national central
banks which provide the single shared platform.150
TARGET2 is the dominant method of large value Euro payments, with 89 per cent of the
market in 2009, representing some a total of 88 million payments with a value of €551,174
billion.151
We now deal with the details of payment using TARGET2.152
(a) Instruments
TARGET2 applies to credit transfers, direct debit instructions (in respect of certain wholesale
transactions) and liquidity transfers.153
Payment orders may be submitted up to five business
days before the specified settlement date (also called warehouse orders).
(b) Participation in TARGET2
TARGET2 essentially consists of individual payment systems operated by each central bank
for a country participating in TARGET2, and the SSP. Each separate system is called a
"payment module". A bank (or other permitted institution) participates in TARGET2 by
participating in an individual payment module operated by a particular central bank and the
SSP.154
The central bank will open at least one account for each user, called "the PM
account".155
The PM account is a RTGS account.156
Liquidity for payments to be made by a
participant may come from a variety of sources including existing funds on its RTGS
account, finance provided by a central bank against eligible collateral, incoming payments
and funds arising from commercial operations such as swaps. In addition, TARGET2 benefits
from a number of highly sophisticated liquidity optimisation features designed to avoid
148
The six are Denmark, Poland, Estonia, Latvia, Lithuania and Bulgaria. In addition there were 17 euro area
central banks: Austria, Belgium, Finland. France, Germany, Greece, Ireland, Italy, Luxembourg, Portugal,
Slovenia, Spain, the Netherlands, Malta, Cyprus, Slovakia and the ECB: Target Annual Report 2009 (ECB),
p.11. 149
Payment Systems Oversight Report 2007 (Bank of England), Para 2.2. 150
Information Guide for TARGET2 Users (ECB, October 2009), p.11. 151
Target Annual Report 2009, p.15-16. 152
What follows is largely derived from the 2007 ECB Guideline for TARGET2, ECB/2007/2, and the ECB
Information Guide for TARGET2 Users. 153
Information Guide, p.16. 154
Harmonised Conditions (referred to at para.3-062 below), art.3. 155
Harmonised Conditions, art.12. 156
Laurinavicius, Lober and Weenink, "Legal Aspects of TARGET2", [2008] J.I.B.F.L. 15 at p.20. Although
legally TARGET2 consists of a number of separate national systems, it operates an integrated system which,
with one or two minor exceptions, treats the euro area as a single payment zone. This in turn allows multi-
country banks to centralise payment processing in euros. An example would be where Bank A (located in
country A) and Bank B (located in country B) both have branches in country C. However, both Banks A and B
have centralised payment processing in their respective head offices. It follows that a TARGET2 payment from
Bank A's branch in country C to Bank B's branch in country C would be transmitted through TARGET2 from
Bank A's head office in country A to Bank B's head office in country B. Funds would be transferred between
Bank A's account with the central bank of country A and Bank B's account with the central bank of country B.
Law of Bank Payments
gridlock if a particular participant is short of available funds due to payment not being
received from another participant.
A user of TARGET2 may be a direct participant or an indirect participant. Banks
established in the European Economic ("EEA"), or with a branch there, are eligible for direct
participation in a payment module if they comply with entry requirements. In addition, a
central bank may allow other institutions to participate, such as treasury departments of
government, public sector bodies. investment firms established in the EEA and organisations
providing clearing or settlement services.157
TARGET2 may also be used to settle sums owing under other systems (called ancillary
systems), such as retail payment systems, large value payment systems, foreign exchange
systems, money market systems, clearing houses and securities settlement systems).158
Settlement may be in real time, or in batches.
The sole point of contract for a user is the TARGET2 desk at the central bank responsible
for the account of the participant bank concerned.159
(c) TARGET2 payment process
A participant, D, who wishes to make a payment to another participant, C, will send a SWIFT
message in the prescribed form (MT 103 for a company payment, MT 202 for a payment by a
bank and MT 204 for a direct debit).160
The SWIFT message will be received by C following
a successful transfer of funds in the SSP.
In the case of a direct debit, the user authorises another user to issue a direct debit order,
and informs its central bank.161
Customer payments may be made between 07.00 and 17.00, while interbank payments
may be made between 07.00 and 18.00. All times are European Time ("CET").
Participants may specify an earliest debit time, or latest debit time, after or before which
settlement must take place; otherwise payment instructions are settled immediately, or at the
end of the business day on which they were accepted, provided that sufficient funds are
available in the payer's account.162
If funds on D's account are insufficient, payment instructions are put in a queue in
accordance with the priority established by the participant. The participant may also prescribe
liquidity limits in relation to other participants, which will reserve liquidity for more urgent
payments.
The SSP will debit the PM account of D, credit the PM account of C, and send a message
to SWIFT authorising release by C of the payment.
Once a payment has been debited to the PM account it is irrevocable.163
Each user has a separate contract with SWIFT in relation to the communication services
provided by it; the central bank providing the payment module to the user has no liability in
respect of the acts or omissions of SWIFT.164
157
Harmonised Conditions, art.4. Direct participants may authorise branches within a group to have direct
access (multi addressee access) and a direct participant may direct payments for it to a correspondent or branch
(using a bank identifier code or BIC): Information Guide, p.23-24. 158
Target Annual Report 2009, p.44. These are six ancillary mechanisms known as ASI (ancillary system
interface). 159
Information Guide, p.13. 160
See generally Information Guide, p.14, 16. 161
Information Guide, p.16. 162
Harmonised Conditions, art.20. 163
Guideline, art.22, (ECB/2007/2; 2007/600/EC; [2007] O.J. L237/1) and Settlement Finality Directive
98/26/EC, art.3(1). Payment orders which are included in an algorithm in a computer program may not be
revoked while the algorithm is running. 164
Harmonised Conditions, art.41.
Law of Bank Payments
(d) Legal framework165
The legal framework for TARGET2 is mainly set out in the 2007 Guideline of the ECB on
TARGET2.166
This sets out the conditions which are to be applied by every participating
central bank to its relations with every user (the Harmonised Conditions in Annex II). In
effect the Harmonised Conditions set out a code governing all aspects of the use of
TARGET2. A feature of the scheme is that any claim by a user will only be made against the
central bank for the payment module used, and not against the single shared platform
providers.167
The Guidelines also set out rules governing the technical requirements for
communications, charges, liability, compensation and the governing law and jurisdiction.
(6) EBA Clearing: EURO1, STEP! and STEP2 payment systems
On January 1,1999 the ECU ceased to exist and was converted into the new European single
currency (the Euro) at a conversion rate of 1:1.168
The existing ECU clearing and settlement
system was replaced by a new Euro system originally run by the Euro Banking Association
(EBA), formerly the ECU Banking Association. The various Euro payment systems, EURO1,
STEP1 and STEP2, and now managed and operated by ABE Clearing S.A.S. (EBA
Clearing), a company incorporated under French law, with 66 banks as shareholders. The
EBA's same day value Euro clearing and settlement system (EURO 1) provides volume
clearing facilities for all EU Member States through over 66 major banks operating in
Europe. The EURO1 system offers a cheaper alternative than using TARGET2169
to make
large value cross-border payments in Euro.170
Since then EBA Clearing has introduced a
system for payment of Euro payments (STEP1), and a system for bulk payments (STEP2).
(a) EURO1 payment process171
A member bank sends a SWIFT payment message which is identified as an EBA Clearing
payment and copied to the EBA Clearing processor (also operated by SWIFT).172
On receipt
by the EBA Clearing processor the payment is assessed against the relevant sending and
receiving bank limits. Where the payment is within the relevant limits it is processed and
transmitted, via the SWIFT network, to the receiving bank. The payment message may be
revoked by the sending bank up until the time it is processed by the EBA Clearing processor.
Where a message would cause a relevant limit to be breached the message is queued by the
EBA Clearing processor until such time that other processed payments create the necessary
headroom under that limit. The EBA Clearing monitors member banks’ net positions and
queues in real-time, and there is a facility to prevent gridlock (invoking a circles processing
procedure). Each member bank has a multilateral debit and credit limit, which under EBA
Clearing's legal framework (the Single Obligation Structure) represents the maximum
allowed single obligation of claim of that member towards the group of all other members.
The limits are binding throughout the operating day, and are each capped at a maximum of €1
billion.
165
Laurinavicius Lober and Weenink, "Legal Aspects of TARGET2" [2008] J.I.B.F.L. 15. 166
ECB/2007/2; 2007/600/EC; [2007] O.J. L237/1. It is binding on euro area central banks: art.14.3 of the
ESCB Statute (see para.3-049). The Guideline is expected to be revised in late 2010. 167
Guideline, art.3. 168
Regulation 1103/97 art.2 adopted pursuant to art.235 of the Maastricht Treaty, which became law in all EU
Member States on June 20, 1997. 169
See para.3-055, above. 170
N. O'Neill, "Cross-Border Payment Arrangements for the Euro" [1998] J.I.B.F.L. 123 at p.124. Certain large
payments such as those with monetary policy counterparts are required to be made through TARGET2. 171
http://www.ebaclearing.eu, EUR01, Operational Basis (2010) [Accessed August 26, 2010]. 172
For detailed discussion of the SWIFT messaging system, see para.3-008, above.
Law of Bank Payments
(b) EURO1 single obligation structure
The 1 Euro clearing system operates using a form of net settlement—the "Single Obligation
Structure".173
Under the single obligation structure, the member banks are bound by a
contractual agreement, governed by German law, whereby, at any given time during the
processing day, there is only one payment obligation or claim of each member with respect to
the group of all other members. Under this arrangement clearing between member banks will
occur continuously as messages are exchanges between them, with the eventual single
obligation being settled at the end of the day. The end-of-day payment will act as settlement
of the final obligation due between each member and all other members, as calculated at the
end of the clearing day. Settlement is via accounts with the ECB which treats EURO1 as an
ancillary system. In other words, through the cumulative combination of all of a member
bank's payments and receipts throughout the day, each member bank is considered to owe to,
or to be owed by, all other member banks a single net amount - only at the end of the day, or
upon intra-day default by a member bank, will the single net obligation crystallise into a debt
owed to or by the other members of the system.174
There has been some concern over whether the single obligation structure involves a form
of multilateral netting which may not be enforceable under the laws of all EU Member States
on the insolvency of one of the member banks. Under English law, for example, a multilateral
netting arrangement may be challenged by a liquidator of a participant on the grounds that it
allows set-off of claims in relation to which there is no mutuality and that it infringes the pari
passu principle.175
However, it appears that the EBA Clearing has obtained favourable legal
opinions from all EU jurisdictions (including England) and from all non-EU jurisdictions
where major international banks are incorporated (i.e. the US, Japan and Switzerland) to the
effect that the single obligation structure is robust and could not be challenged following the
insolvency of a member bank incorporated in those jurisdictions.176
Implementation in EU Member States of the EC Directive On Settlement Finality In
Payment And Securities Settlement Systems has clearly reinforced the robustness of the EBA
Euro clearing system in this respect.177
The directive provides, inter alia, that (i) transfer
orders and netting are to be legally enforceable and binding on third parties, even in the event
of insolvency proceedings, provided the transfer orders were entered into the system before
the moment of opening of the insolvency (art.3(1)); (ii) there is to be no unwinding of a
netting because of the operation of national laws or practice which provide for the setting
aside of contracts and transactions concluded before the moment of opening of insolvency
proceedings art. 3(2)); (iii) a transfer order is not to be revoked by a participant in a system
nor by a third party, from the moment defined by the rules of that system (art.5); and (iv)
insolvency proceedings are not to have retrospective effect on the rights and obligations of a
participant arising from, or in connection with, its participation in a system earlier than the
moment of opening of such proceedings (art.7). The moment of opening of insolvency
proceedings is the moment when the relevant judicial or administrative authority handed
173
Practical Issues Arising from the Introduction of the Euro (Bank of England.Issue No.6, December 10,
1997), pp.22-23; Practical Issues Arising from the Introduction of the Euro (Bank of England, Issue No.10,
December 14, 1998). p.75. 174
N. O'Neill, "Cross-Border Payment Arrangements for the Euro", [1998] J.I.B.F.L. 123 at p.124;
http://www.ebaclearing.eu, EURO1 Takes Advantage Of An Innovative Legal Structure (2010) [Accessed
August 26, 2010]. 175
See British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 2 All E.R. 390 HL. 176
http://www.ebaclearing.eu, EURO1 Takes Advantage Of An Innovative Legal Structure (2010) [Accessed
August 26, 2010]. N. O'Neill, "Cross-Border Payment Arrangements for the Euro" [1998] J.I.B.F.L. 123 at 124. 177
EC Directive 98/26 of May 19, 1998, implemented in the UK through the Financial Market and Insolvency
(Settlement Finality) Regulations 1999, SI 1999/2979 (see para.3-087, below); Gullifer, Goode on Legal Aspects
of Credit and Security, 4th edn (London: Sweet & Maxwell, 2009), para.6-35.
Law of Bank Payments
down its decision (art.6(1)).
(c) EURO1 settlement process178
Before June 2010, settlement under the EURO1 system took place via accounts with the
ECB. However, delays sometimes occurred if all payments in were not received promptly.
Consequently, in June 2010 EURO1 became an ancillary system under TARGET2. At the cut
off time for sending payment instructions to EURO1 (16.00 Central European Time), the
EURO1 processes all outstanding instruction and sends it to EBA Clearing. EBA Clearing
sends a file to TARGET2 using the ancillary system with the amounts to be debited and
credited to participants RTGS accounts. This allows processing by the TARGET2 cut off
time of 18.00 CET. The debts are processed first, followed by credits. Once all debits and
credits have been processed, TARGET2 sends a confirmation to EBA Clearing. Settlement
normally takes less than 5 minutes. EBA Clearing then notifies all participants of completion
of settlement.
The ECB holds a liquidity pool of about €1 billion on behalf of the EBA and its members,
which acts as an emergency source of liquidity in case an EBA member should fail to make
its end-of-day settlement payment into the settlement account. Each member bank contributes
an equal share to the liquidity pool. In the event of multiple failure in excess of the size of the
liquidity pool, the surviving members are contractually bound to make up the shortfall
according to an agreed loss allocation formula.
(d) STEP1 Euro payments
The EURO1 system is only open to banks meeting minimum credit requirements. In 2001
EBA Clearing made it possible for all banks operating in the EU to participate indirectly in
the EURO1 system, through the account of a bank which does participate in EURO1.179
Essentially, the STEP1 bank communicates payment instructions by SWIFT to a EURO1
bank by 14.30 in order that the EURO1 bank may include them in that day's instructions for
EURO1 payments.180
(e) STEP2 credit transfers
STEP2 is family of payment systems for electronic funds credit transfers or payment of direct
debits. STEP2 has operated since January 2008 to enable credit transfers to be made
throughout SEPA in accordance with the requirements for SEPA credit transfers (see below).
The system is based on SWIFT messages from the payer to the central platform, and from
that central platform to the settlement provider, TARGET2, and the payee. Key features of
the systems are that settlement takes place before the payment instructions are delivered, and
settlement takes place on a multilateral basis. Files may be submitted for clearing overnight,
or by 13.00 for settlement at 14.00. Settlement is therefore not in real time.
STEP2 has also operated since November 2009 to enable direct debits to be paid
throughout SEPA in accordance with SEPA direct debit requirements.
(7) SEPA Credit Transfers And Direct Debits SCT and SDD
The European Payments Council ("EPC") has developed standards and rules for credits and
debits in Euros (known as SCT and SDD payments; see generally para.3-052). The central
idea is that it should be as easy to send electronic payment to a recipient in any SEPA State as
to a payee in the same State, and for the same cost.
178
http://www.ebaclearing.eu EUROI, Settlement Process [Accessed August 26. 2010]. 179
http://www.ebaclearing.eu, STEP1, Features and Functioning (2010) [Accessed August 26, 2010]. 180
See generally STEP2 SEPA Credit Transfer Service, EBA Clearing 2010, and STEP2 SEPA Direct Debit
Service, EBA Clearing 2010.
Law of Bank Payments
The SEPA area encompasses all EU Member States (currently 27) and Iceland,
Liechtenstein, Norway, Switzerland and Monaco.181
The SEPA credit scheme was launched on January 28, 2008. By May 2010, SEPA credit
transfers accounted for some 8 per cent of the total of cross-border Euro payments.182
The
SEPA direct debit scheme was launched on November 2, 2009.
(a) The infrastructure
Essentially the EPC has developed uniform rules and standards for credit transfers and direct
debits, to which participants adhere (the Scheme Layer). The infrastructure is a matter which
is left to the participants (the Infrastructure Layer). It is envisaged there may be a number of
different providers of a clearing and settlement mechanism (CSM), and competition between
such CSM providers. However, the EPC has set out a framework of principles with which
providers of CSM services must comply. The main requirements include a requirement that
it must be possible for a payment to reach any account which complies with the SEPA
requirements in any SEPA State (called reachability), and that systems used in the clearing
and settlement of SEPA payments must be interoperable. This model of infrastructure is
called a Pan European Automated Clearing House (or PE-ACH). The framework principles
are called the PE-ACH CSM framework.
(b) SEPA credit transfer
The rule book for SEPA credit transfers183
is: "a set of rules, practices and standards to achieve interoperability for the provision and
operation of a SEPA payment instrument agreed at interbank level".184
For a diagram of how a SEPA credit transfer is made see the diagram below. Participants
in the scheme adhere by way of an agreement.185
The rulebook is governed by Belgian law, as
is the adherence agreement.
SEPA credit transfers may only be made in Euros (r.2.2). The rulebook does not impose
any limit on the amount of a transfer, though banks may impose them (r.2.5). The full sum
transferred must be received into the payee account, although charges may be levied on the
payer and the payee (r.4.2.4).
Messages between banks comply with IS020022. The remittance data field is limited to
140 characters. There is a single standard for identifying a bank account.
It is intended that the scheme may be applied to internal as well as cross-border payments,
and to bulk as well as individual payments.
Transfers must be received within two business days of the payment instruction being
accepted. From January 1, 2012 the payment must be received within one business day
(r.4.2.3).
A transfer can be returned within three business days of the settlement date if it cannot be
credited on the basis of the information in the payer's instructions (r.4.4). A transfer can be
recalled within ten business days after the execution date by the paying bank on behalf of a
customer for these reasons only: "duplicate sending", Technical problems resulting in
erroneous "transfers, and "Fraudulent originated Credit Transfer" (r.4.4)
181
Pendulum-ACH Framework (Document EPC170/05, version 1.2, June 24, 2008). 182
EPC Newsletter Issue 7 (July 2010). 183
SEPA Credit Transfer Scheme Rulebook (EPC125-05, Version 4.0, October 30. 2009). In June 2010 the
European Parliament and the Council proposed a regulation for setting up essential requirements for credit
transfers and direct debits in Euros: COM/2007/0856. If made final the regulation will have a significant impact. 184
SEPA Credit Transfer Scheme Rulebook, r.0.3. 185
SEPA Credit Transfer Scheme Rulebook, r.0.5.3 and r.5.
Law of Bank Payments
SEPA credit transfer
The paying bank should ensure the "authenticity and validity" of the transfer instructions
(r.5.7) and check the destination details.
A paying or receiving bank may be liable to compensate the other for breach of the
rulebook, negligence or operational failure (r.5.9). However, liability is limited to the amount
of the transfer except in cases of "wilful intent" (r.5.9).
(c) SEPA Direct Debit
The SEPA rulebook for direct debits186
applies to the collection of funds from a payer's
account which is initiated by a payee based on the authorisation or mandate given by the
payer to the payee (r2.2). Participants in the scheme adhere by way of an agreement (r.1.4).
The rulebook is governed by Belgian law, as is the adherence agreement. The mandate must
be governed by the law of a State in the SEPA area. For a diagram of how a SEPA direct
debit is made see the diagram below.
186
SEPA Core Direct Debits Scheme Rulebook (EPC016-06, Version 4.0, October 30, 2009).
Law of Bank Payments
SEPA direct debit
Direct debits can be recurrent or one off. The scheme only applies to debits in Euros.
There is no limit on the value of a debit under the scheme, though banks may impose limits
on customers.
There is a strict timetable for the submission of direct debit instructions (r.4.3). In general,
the debit should be settled and paid on the same day as due (r.4.3.1). The paying bank may
reject a direct debit for technical reasons, or when unable to process it (r.4.4). The payer may
for any reason request that the paying bank not pay a direct debit (r.4.4). A payee may request
a reversal of a payment, although the receiving bank is not obliged to recredit the payer
(r.4.4).
A paying or receiving bank may be liable to compensate the other for breach of the
rulebook, negligence or operational failure (r.5.9). However, liability is limited to the amount
of the transfer except in cases of "wilful intent".
There is an optional scheme for electronic direct debit mandates at Annex VII to the
rulebook, and a separate scheme for business to business direct debits.
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