The Clearing Houses Automated Payment System (CHAPS) is a same-day electronic funds transfer system, processing over 90% of all intra-bank payments in the UK by value.
CHAPS currently processes an average of over £275 billion through nearly 140,000 payments each day. It is mainly used for high-value payments between banks and large corporates, but is also extensively used in other time-critical payments, such as house purchases.
Payment instructions are routed through the Bank of England and settled across the accounts which paying and receiving banks maintain with the Bank of England. CHAPS is a same-day system – payments sent on a business day are credited to the customer’s account on the same day. The cut-off time for payments through the system is 4pm, although banks usually specify an earlier time to their customers so that payment orders can by processed and submitted in time. The aim is for payments to be transmitted within 90 minutes.
But what does the processing entail? Since 2007, all the major UK clearing banks have processed and routed electronic payments on the basis of sort code (or bank identifier code – BIC) and account number. This is known as the “straight-through” basis – the BIC and the account number are processed electronically with no manual checking and, in particular, no checking of the name of the person being paid.
However, bank standard forms for CHAPS payments usually require the payee’s name, primarily for anti-money laundering and counter-terrorism purposes. What if the name and the BIC/account number don’t match?
The name doesn’t count
The Court of Appeal had to consider the issue recently* (apparently, the first time a CHAPS payment has been the subject of court proceedings). A customer (X) instructed its bank to pay a supplier by CHAPS – the name of the intended payee was correctly given by X on the bank’s instruction form, but the sort code and account number given were (unknown to X) not those of the supplier, but of a completely unconnected company. The paying bank and the receiving bank of the incorrect payee processed the payment. The (almost) inevitable happened – by the time X discovered the mistake, the wrong payee had disappeared with the money.
Perhaps not entirely surprisingly, X’s claim against its bank that the discrepancy should have been spotted was dismissed. The court held that a customer who used CHAPS was taken to contract on the basis of the banking practice that governed CHAPS transactions. It was clear and settled practice that the beneficiary’s name was not checked with the other identifiers of sort code and account number. In addition, the court noted the impracticality of making such checks when set against the payment transmission time of 90 minutes.
Check the numbers
It is not clear from the court’s judgement how the mistake came to be made. The decision does, however, highlight the importance when using CHAPS, of ensuring that a payee’s sort code/BIC and account number are correct and come from a trusted source. This could, for example, come by way of written confirmation from the payee’s bank, although only the payee could arrange this.
Although a customer may be required to list the payee’s name, it should not be assumed that this will be used as a checking mechanism by either the paying or receiving bank.
*Tidal Energy Limited v. Bank of Scotland  EWCA 1107