Cheques to decline further as guarantee system ends

Banks will no longer underwrite cheques from 30 June, making it easier to lose money on bounced cheques. Julian Knight investigates

Consumers and businesses accepting cheques are being warned that, in just a few weeks, the bank guarantee which underwrites the whole system will be abolished, potentially putting millions of Britons at greater risk of losing out.

From 30 June, the UK cheque guarantee card system will be brought to an end, seven years before cheques themselves are phased out. This means that individuals and businesses accepting a cheque will no longer be able to rely on the issuing bank honouring it as a matter of course.

"Many Britons will not be aware of this fundamental change which means that they – and small business in particular – will have to be more careful under which circumstances they accept a cheque because the bank guarantee that backs it is no more," said Prue Watson, spokeswoman for the Federation of Small Business. Currently the cheque system means that up to £250 is guaranteed to be paid by the bank.

Without this guarantee in place, people and businesses that receive cheques will have to take up the cudgels should a cheque bounce. "In instances where the amount is small, the receiver of the bounced cheque will have to decide whether or not they can afford to pursue a bad debt privately through the courts. I imagine there will be scenarios where this is just too expensive. This action by the banks could seriously damage the cash flow of businesses at a time when money is extremely tight," said Ms Watson.

The UK Payments Council, which represents the banking industry, said that the move to scrap the guarantee will affect only a small percentage of cheques. "Last year, just 7 per cent of cheques were backed by a cheque guarantee card," said Sandra Quinn, communications director of the Payments Council. However, as consumer group Which? points out,this still equates to 95 million cheques. "This is not a small number. The banks justify the end of cheques on the grounds that they are in terminal decline. But by ending the cheque guarantee system so early the banks are accelerating the process of decline. This is another nail in the coffin of cheques," James Daley, editor of Which? Money, said.

Groups representing older people have also railed against the decision to end cheque guarantees so soon. "This is simply about the banks not wanting to underwrite the cheque system any more, because it costs them to administer and also when a cheque bounces they may lose out. But what they have got to understand is that cheques are an essential consumer and business service. Older people and small businesses are not geared up for online banking and Bacs transfers as the banks would like us to be," said Dr Ros Altmann, director general of Saga.

The part-nationalised banks RBS and Lloyds should set an example and continue to guarantee all customer cheques Dr Altmann added. "It would be good if these institutions were to keep this useful service going, at least until cheques themselves are abolished." This is echoed by Ms Watson. "We don't accept that there is a need to abolish cheques full stop. But if it does come to pass in 2018 it would be much better for consumers and business and for the sake of clarity that the cheque guarantee system stayed in place until then," she said.

However, in response, Ms Quinn said that the onus was on customers to ensure that the system worked without banks offering a guarantee. "Ultimately it's up to people to ensure that they don't write cheques that bounce. As for those receiving cheques dated after 30 June, the message is that they will not be guaranteed by the bank and it will be up to individuals and business to pursue non-payment," she said.

Nevertheless, last Friday was the deadline for submissions to the Treasury Select Committee relating to its reopened enquiry into the abolition of cheques. In particular, the committee, inundated by public concerns, had seemed unconvinced by the Payments Council's argument that the cheque system was fast becoming an expensive anachronism.

When the reopening of the enquiry was announced, committee chairman Andrew Tyrie said that the banks had failed to consider the millions of people who are not comfortable with using more modern payment methods. In addition, Mr Tyrie had said he was "shocked" at the statistical evidence put forward by the Payments Council at the previous enquiry in favour of cheque abolition.

One key submission to the reopened enquiry has come from the Institute of Fundraising stating that there should be no abolition of cheques until alternative methods of payments have been introduced. The charity sector is calling for a delay to abolition of at least 10 years.

But opponents of the switch-over will be aware that time is running out. "I hope that the Treasury Select Committee tells the banking industry that it needs to keep the cheque guarantee system up and running rather than abolishing it on 30 June, at least until they have reported on the matter. The banks are behaving in a draconian way and we are in danger of cheques being got rid of by the back door on 30 June," Dr Altmann said. Mr Daley added: "Once this useful system of cheques and guarantees is gone, it's gone."

Q&A

Will I still be able to write cheques after 30 June?

Yes, but you may find the numbers of people and businesses willing to accept a cheque declines.

What happens if I accept a cheque and it bounces?

The banks say it is up to you to pursue the debt.

My local supermarket doesn't accept cheques so what's the problem with phasing out?

Many large retailers have already stopped accepting cheques but many small businesses and private individuals still do. About 1.4 billion cheques are cashed annually.

When will cheques be phased out?

The date set by the bank is 2018 but many groups want a delay.