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Bank changes to electronic payment processing guidance issued

15 December 2016

The New Zealand Law Society's Property Law Section has issued guidance on changes to the way banks process electronic payments.

In November 2016 banks implemented two different changes to the way electronic payments are processed, it says.

Intraday processing: Banks now have a 1-hour processing timeframe for all electronic payments and direct debits. Prior to this change, the majority of electronic payments were made between 9pm and midnight (with the exception of Same Day Cleared Payments). 

Cleared funds processing: Electronic payments will no longer be dishonoured for insufficient funds. This means the recipient of the funds will have immediate access to those funds, once they are received into their account.

The combination of intraday and cleared funds processing together resembles Same Day Cleared Payments (SCP). SCP has traditionally been used for making high value or urgent payments, where the payee needed irrevocable funds within the day. Now, because electronic payments will no longer be dishonoured for insufficient funds, all funds paid electronically can be treated as irrevocable. The new intraday processing system means electronic payments will be processed hourly and therefore will be available as cleared funds to the payee within the day. 

There no longer appears to be a material difference between what is offered under the SCP payment system and the way all electronic payments are now made. However, these two new payment systems do not replace the requirement to make an electronic transfer of funds strictly in accordance with the requirements set out in the Property Law Section Guidelines.  The PLS Guidelines extend further than just making a same day irrevocable payment; they include the use of undertakings and payee notifications.

SCP is characterised by the presence of HCVS rules that govern a Service Level Agreement (SLA) that exists between the banks (including the small agency banks). There is a guaranteed 60 minute processing time involved, from the time the payment is debited from the payer, to the time the beneficiary notification is generated.  Cleared funds processing, while generally increasing the frequency of electronic funds processing, does not offer the same guarantee.

Remember, the use of the PLS Guidelines is given contractual force in the REINZ/ADLSi Agreement for Sale & Purchase (Ninth edition 2012 (5)) (‘the Agreement’).  The Agreement contains a clause that directs parties to use the PLS Guidelines unless both parties agree to an alternative form of settlement (see cl 1.1 (5) (a) and (b) of the Agreement and PLS Guidelines Chapter 6 (Guidelines 6.1 - 6.14)).

Solicitor trust accounts

Before the recent implementation of intraday and cleared funds processing, the major banks notified all their clients of the changes and included a warning that if there are insufficient funds in a payer’s account when the payment is released, the payment will not be processed.  This has obvious implications for property settlements.  This has prompted reports to the Property Law Section from property practitioners concerned about their solicitor trust accounts going into overdraft, or settlement payments failing.

In practice, law firms have an available daily facility (“intraday payment limit”, “force limit”, “technical overdraw”) for property settlements in place with their bank. Some firms appear to know what these limits are, while others do not. There does appears to be an issue around whether a law firm has been advised of such a limit. If you are not sure about yours, please contact your bank Relationship Manager.

You will need to be proactive about managing your solicitor's trust account. We urge you to make contact with your bank Relationship Manager to discuss any concerns you have about the general operation of your trust account, and particularly, prior to settlement if you are aware there will be insufficient funds at the time of an outgoing payment.

Other trust account considerations for you to be aware of are:

  • Funds on call deposit required for a settlement need to be taken off deposit at least an hour before settlement; and
  • Ensure you have received any bank loans required for a settlement before settling.

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Last updated on the 15th December 2016