Chaps

What Is CHAPS?

CHAPS, which stands for Clearing House Automated Payment System, is a critical component of the United Kingdom's financial infrastructure, serving as a high-value payment system. It facilitates the efficient and irrevocable transfer of sterling payments between accounts held at different financial institutions. As a type of Real-Time Gross Settlement (RTGS) system, CHAPS processes each payment individually and immediately, eliminating settlement risk between participating entities. CHAPS falls under the broader category of Payment Systems, which are essential for economic activity and the seamless flow of funds. The system is designed for large and time-critical transactions, ensuring that funds are available to the recipient almost instantly once the payment is settled.

History and Origin

CHAPS was originally established in London in February 1984 by the Bankers Clearing House. Its creation aimed to modernize and speed up the transfer of large sums of money, moving away from slower, paper-based clearing methods like "town clearing," which CHAPS eventually superseded in 1995. Initially, the system facilitated high-value and time-sensitive payments, including wholesale transactions. Over the years, the system evolved to meet the changing needs of the financial industry. In November 2017, responsibility for operating the CHAPS system, including setting its rules and technical standards, was transferred from private companies to the central bank, the Bank of England, a move made to enhance financial stability in the UK and align with global central banking practices³⁰.

Key Takeaways

• CHAPS is the UK's high-value, real-time gross settlement (RTGS) payment system for sterling.
• It facilitates immediate, irrevocable, and risk-free settlement of individual payments.
• There are no minimum or maximum payment limits for CHAPS transactions.
• CHAPS is primarily used for large, time-sensitive payments such as property purchases, corporate transactions, and interbank transfers.
• The system is managed and operated by the Bank of England.

Interpreting the CHAPS

CHAPS payments are designed for situations where large sums of money need to be transferred securely and with immediate finality. The "real-time" aspect means that the transaction is settled as soon as it is received, with funds credited to the recipient's account almost instantaneously. "Gross settlement" indicates that each transaction is processed individually, without being bundled or netted with other payments, which fundamentally reduces credit risk and settlement risk for the participating banks. This contrasts with systems that net payments, where settlement occurs at a later time, potentially exposing participants to risk if a party defaults before final settlement.

Many financial institutions, including high-street banks and international banks, act as direct participants in the CHAPS system²⁸, ²⁹. Other thousands of financial institutions access CHAPS indirectly through these direct participants, a process known as correspondent banking or agency banking²⁶, ²⁷. The system typically operates on weekdays, with specific cut-off times for payments to be processed on the same day²⁵.

Hypothetical Example

Consider a scenario where John is purchasing a house for £500,000. On the day of completion, his solicitor needs to transfer the substantial sum to the seller's solicitor. Given the high value and the time-critical nature of the transaction—as funds must be received and cleared for the property transfer to be legally finalized on the same day—the solicitor will typically initiate a CHAPS payment.

John's solicitor will instruct their bank to make the CHAPS transfer, providing the seller's solicitor's bank details and the exact amount. The bank, acting as a payment service provider, processes this request. Because it's a CHAPS payment, the funds are debited from John's solicitor's account and credited to the seller's solicitor's account almost immediately. This instantaneous and irrevocable transfer ensures that the property transaction can proceed smoothly and on schedule, reducing delays and risks associated with large-value financial exchanges.

Practical Applications

CHAPS plays a pivotal role in various high-value and time-sensitive financial transactions within the UK economy. Its primary applications include:

• Property Transactions: CHAPS is commonly used by solicitors and conveyancers to transfer funds for house purchases, land acquisitions, and other property-related settlements.
• ²³, ²⁴ Corporate Payments: Businesses utilize CHAPS for significant payments such as settling large invoices with suppliers, paying taxes to government bodies, or making dividend distributions.
• ²¹, ²² Financial Market Settlements: Financial institutions frequently use CHAPS to settle high-value money market and foreign exchange transactions, ensuring the smooth operation of wholesale financial markets.
• ¹⁹, ²⁰ Interbank Settlements: It serves as a primary mechanism for banks to settle obligations with one another, forming the backbone of the UK's interbank settlement system.
• ¹⁸ High-Value Personal Transfers: Individuals may also use CHAPS for very large personal transfers, such as purchasing expensive assets like cars or making substantial deposits.

Th¹⁶, ¹⁷e Bank of England highlights that CHAPS processes approximately 0.5% of total UK payment volumes but accounts for about 92% of the total sterling payment values, underscoring its importance for significant financial movements.

##¹⁵ Limitations and Criticisms

While CHAPS offers significant benefits in speed and finality for high-value payments, it also has certain limitations. One notable aspect is the associated cost, which is typically higher than other electronic payment methods due to its premium, real-time nature. Fee¹³, ¹⁴s for a CHAPS transfer can range significantly depending on the banking institution.

An¹²other limitation is its operating hours; while available on all business days, CHAPS operates within specific daily cut-off times (e.g., generally 6 am to 6 pm, excluding bank holidays), meaning payments initiated outside these hours are processed on the next working day.

A ¹⁰, ¹¹significant concern, particularly in recent years, has been the use of CHAPS in Authorised Push Payment (APP) scams. In these scams, victims are tricked into authorizing payments to fraudsters. While CHAPS provides security and irrevocability, this irrevocability can be a drawback for victims of fraud, as funds are instantly transferred and often difficult to recover. The Payment Systems Regulator (PSR) and the Bank of England have introduced new rules, effective from October 2024, to mandate reimbursement for victims of authorised push payment (APP) scams across CHAPS and Faster Payments, aiming to provide consistent protection for consumers. Des⁷, ⁸, ⁹pite efforts to enhance resilience, the system can still be affected by external issues, as seen in July 2024 when a "global payment issue" temporarily disrupted CHAPS, causing delays for high-value transactions, including property purchases.

Fu⁶rthermore, while RTGS systems like CHAPS eliminate systemic risk by settling payments individually, they can increase banks' liquidity needs compared to deferred net settlement systems. Cen⁵tral banks mitigate this by providing intraday liquidity, which, in turn, requires collateral to manage the central bank's own credit risk.

##⁴ CHAPS vs. Faster Payments

CHAPS and Faster Payments are both electronic payment systems in the UK designed for rapid transfers, but they differ significantly in their purpose, value limits, and operational mechanics.

The confusion between CHAPS and Faster Payments often arises because both facilitate quick electronic transfers. However, CHAPS is specifically engineered for the largest and most critical transactions, where the absolute certainty and immediacy of settlement are paramount, such as completing a property purchase. Faster Payments, conversely, handles the vast majority of everyday electronic bank transfers, offering rapid processing for routine payments up to its per-transaction limit.

FAQs

What does CHAPS stand for?

CHAPS stands for Clearing House Automated Payment System.

How quickly does a CHAPS payment go through?

CHAPS payments are processed in real-time, meaning funds are typically available in the recipient's account almost immediately after the sending bank initiates the payment during operating hours. This provides immediate settlement.

Is there a limit to how much money I can send via CHAPS?

No, there is no upper or lower limit on the value of a single CHAPS payment. It is de², ³signed for payments of any value, particularly high-value transactions.

Who operates the CHAPS system?

The CHAPS system is operated by the Bank of England, the UK's central bank.

Why¹ are CHAPS payments more expensive than other transfers?

CHAPS payments are generally more expensive because they offer the highest level of security, speed, and finality for individual, high-value transactions. The system ensures immediate and irrevocable Real-Time Gross Settlement (RTGS), which incurs higher operational costs for the participating banks and the system operator compared to other payment methods that may batch transactions or have delayed settlement.