II. ELECTRONIC FUNDS TRANSFER

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1 II. ELECTRONIC FUNDS TRANSFER There are two categories of electronic funds transfer ("EFT") systems: non-consumeractivated 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 nonconsumer-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 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 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) BACS 83 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 to 3-048, below. 83 See generally BPSL Innovation Working Group Report (OFT, May 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.

2 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 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 [Accessed August 26, 2010]. 86 In 2010: [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.

3 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 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 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 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 APACS Annual Review 2002, p.13.

4 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 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 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") BPSL Innovation Working Group Report (OFT, May 2005, OFT789b), p 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.

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6 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 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' notice 103 (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 Guide & Rules, para Guide & Rules, para 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 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 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 Guide & Rules, para Plus postal time. 104 Guide & Rules, para Guide & Rules, para.4.2.

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8 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 on Day T. This ensures that none of the direct debits are delivered to the destination banks. Requests received after 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 Guide & Rules, para See, generally, Guide & Rules, paras 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 See, generally, Guide & Rules, paras Guide & Rules, para.11.5.

9 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, 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 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 CHAPS Rules (Version 2.0), 2009, r CHAPS Rules (Version 2.0), 2009, r In 2010:

10 (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 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 Becher, Galbiati and Tudela, The Timing and Funding of CHAPS Sterling Payments, FRBNY Economic Policy Review, September 2008.

11 (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 CHAPS Rules (Version 2.0), r CHAPS Rules (Version 2.0), r 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 below. 128 CHAPS Rules (Version 2.0), r

12 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 Payments 130 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 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 ). 130 See further para 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 [Accessed August 26, 2010]. This summary is large drawn from those sources as at August Formerly called the CHAPS and Town Clearly Company Limited until the closure of the Town Clearing system.

13 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).

14 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 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 [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 (August 2010) [Accesses August 26, 2010] (May 2010) [Accessed August 26, 2010].

15 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 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 CET on settlement day, CLS Bank settles instructions individually on the members' accounts by simultaneously debiting the subaccount 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 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 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 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.

16 (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 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 Union 139 ("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, 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 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 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/ 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/ 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 at Payments and Markets (2010) [Accessed August 26, 2010].