Cheques

Cheques are paper items which are physically transferred between banks. Although the paying bank receives some of the data electronically, the cheques themselves must also be transferred so that they can be examined by the paying bank for security and fraud prevention purposes. However some banks do clear cheques drawn on their own branches faster.

Cheque clearing is paper-based and was not designed to be an electronic system. Volumes are declining and it makes more sense to target investment toward card and electronic payment systems where growth is consistent. For example, more than £1 billion was invested in rolling out chip and PIN on all credit and debit cards.

This issue is not driven by the clearing system but is a commercial decision for each bank or building society. Most high street banks allow customers to withdraw funds on the fourth or fifth day (i.e. if a cheque is paid in on a Monday, funds may be withdrawn on Thursday or Friday). Under The Banking Code, banks are required to provide clear details of their policies on this issue to their customers, and whether they add extra days to the central clearing cycle.

Customers should ensure that they have an account which best suits their needs. If quicker access to cheque funds is important, they should shop around for an account which offers more favourable terms. Some accounts allow early access to funds from cheques, possibly as early as day one of the clearing cycle. However, customers should be aware that if a cheque were to be returned unpaid after funds have been withdrawn, then in most cases the bank would seek reimbursement from them.

You can request your bank to stop payment of a cheque before it makes its decision whether or not to pay it. If payment of the cheque was guaranteed by a cheque guarantee card, you cannot subsequently ask your bank to stop payment.

To enable the recipient of a cheque to know as soon as possible whether it will be paid, they can ask their bank to specially present that cheque. Their bank then sends the cheque by first-class post directly to the paying bank, contacting them by phone on the following working day to confirm whether it will be paid. The payee may not receive the funds any sooner, but has the knowledge that there are sufficient funds to pay the cheque.

If the cheque is crossed 'A/C payee' it can only be paid into the account of the named payee. The crossing cannot be deleted, nor can the cheque be transferred over to a third party.

If you are paying a cheque to a large organisation such as the HM Revenue & Customs, do not make the cheque payable simply to that organisation. Add further details into the payee line (for example HM Revenue & Customs re: J Jones, your reference xxyyzz). You should draw a line through any unused space on the cheque so unauthorised people cannot add extra numbers or names. (Please see pdf leaflet on the right)

No profit from the central clearing cycle, as no money moves until day 3 when both banks settle across accounts at the Bank of England. However, banks set their own policies on charging and such matters as when customers can start to earn interest, reduce overdraft interest and access funds from cheques. Industry estimates show that the operational costs to the banks of cheque clearing outweigh any financial gain.

Many customers choose to use Direct Debits and standing orders for paying regular bills and commitments. Credit and debit cards have, by and large, overtaken cheques for retail purchases and CHAPS provides an electronic, irrevocable, same-day value system, usually for high-value payments. Telephone and Internet banking are also increasingly used to make payments.

It is common banking practice to reject cheques that are over six months old to protect the payer, on the basis that payment may already have been made by some other means or the cheque may have been lost or stolen. However, this is at the discretion of individual banks. It should not be assumed that cheques in excess of six months old would automatically be rejected — the only certain way to cancel a cheque is to request that a stop be placed on it (although cheques backed by a Cheque Guarantee Card cannot be stopped). It is recommended that, if possible, customers in possession of cheques that are over six months old obtain a replacement. A cheque remains legally valid for six years.

Banks set their own policies on post-dated cheques and, in many cases, their account terms and conditions state that customers should not write them. If the recipient of a post-dated cheque attempts to pay it into their account prior to the date shown, it may either be returned unpaid, possibly incurring charges for both parties, or it may be cleared, creating problems for the customer who issued it. It is important to note that post-dated cheques are not covered by the UK Domestic Cheque Guarantee Card Scheme and could be returned unpaid.

The industry has successfully introduced the Cheque Printer Accreditation Scheme (CPAS) which has over 80 accredited printers. The Scheme lays down security standards to protect against counterfeiting and fraudulent alteration of cheques and Best Practice Guidelines are available to assist designers, printers, business customers and bank staff in this regard.

The Dedicated Cheque and Plastic Crime Unit (DCPCU) was set up in April 2002 to target organised criminal gangs heavily involved in counterfeiting. The banking industry funds this specialist police Unit, which consists of banking fraud investigators working alongside police personnel and cheque fraud is included in its remit.

This depends very much on the facts of each case. If you accept a cheque that subsequently turns out to be fraudulent you should be aware that you may be required to return the funds.

Retailers should ensure they comply with the Conditions of Use of the UK Domestic Cheque Guarantee Card Scheme in order to benefit from the protection that it offers.

There is no cross-border cheque clearing system. Foreign cheques are sent for collection direct to the bank on which they are drawn, a process which often takes several weeks although some banks/ building societies may provide value immediately subject to recourse. This process is known as negotiation. UK cheques are intended for use in the UK only and would have to be sent back here for collection or be negotiated with recourse if paid into a foreign bank.

Some banks offer customers euro-denominated cheque services — generally this means euro-denominated cheques as part of a UK euro bank account. These cheques can only be used in the UK and a euro cheque clearing process exists to process these.

Bankers' drafts and building society cheques are treated the same as ordinary cheques and have to go through the clearing system. The comfort they provide is that it is highly unlikely they would be returned unpaid due to lack of funds. However it is important to note that there is no guarantee against fraudulent use — for example, they may be lost or stolen and then used fraudulently.

These cheques are sometimes issued by card companies to their cardholders and funds are debited to their credit card account. They can also be referred to as convenience cheques. The Banking Code includes best practice on how these credit card cheques are marketed and used.

Some large retailers, by special arrangement, may pay cheques directly into their bank's clearing centre, effectively by-passing part of the clearing cycle. Alternatively, if both the customer and the retailer hold accounts at the same bank branch the cheque would not have to pass through the central cheque clearing. It is important that customers always make sure they have sufficient funds in their account before writing a cheque.

• Don't accept a cheque, or banker's draft, from someone unless you absolutely know and trust them. Be especially wary when accepting a high-value cheque — for instance if you are selling a car.
• Be aware that, even after the value of the cheque has been credited to your account, there is a small risk that the money could be reclaimed IF the cheque subsequently turns out to be stolen or counterfeit.
• Always consider other types of payment for high-value items — an automated payment (takes 48 hours) or a CHAPS payment (a same-day service). There is a small charge for a CHAPS payment but it is a guaranteed same-day value payment. If the buyer is unwilling to pay the relatively small cost involved — or to split it with you — then you really do need to be on your guard.
• Be aware that a bankers' draft is not necessarily safe from fraud. If you receive a bankers' draft in payment for goods you must allow time for the draft to clear before releasing the goods. Bankers' drafts can be stolen or altered like any other cheque and if it is altered, stolen or counterfeit it will not be honoured.

Always contact your bank for advice or refer to your bank's terms and conditions. The British Bankers' Association (www.bba.org.uk) and Metropolitan Police (www.met.police.uk) both have information and facts about cheque fraud on their websites.

If you are concerned about the most suitable payment option, your bank should be able to offer you advice. You have customer protection under The Banking Codes — which set out the standard of service you should expect to receive and provides for those standards to be independently-monitored and enforced.