Banking

1. This section gives guidance on the banking arrangements that should be adopted by the Scottish Administration (including the core Scottish Government and Executive Agencies) and other organisations, including bodies sponsored by the Scottish Government, to which the Scottish Public Finance Manual (SPFM) is directly applicable.

Key Points

2. All bodies to which the SPFM is directly applicable, including bodies sponsored by the Scottish Government, are required to have their core bank accounts with the Office of HM Paymaster General (OPG), except where the Scottish Government's Treasury and Banking Branch (T&B) can be persuaded that the holding of such an account would not be cost effective. A commercial bank account may only be opened following the prior approval of the T&B.

3. Balances in commercial bank accounts should be kept to the minimum consistent with the principles of not providing funding in advance of need and avoiding accounts being overdrawn.

4. Bodies should take appropriate steps to prevent fraud on their bank accounts and transactions.

5. Banking operations should be regularly reviewed - a biennial review would normally be appropriate - and copies of the reviews submitted to T&B.

Operation of OPG Accounts

6. Funds held in bank accounts with the Office of HM Paymaster General (OPG) have the effect of reducing the cost of government borrowing or increasing government income from interest. In order to maximise the benefits to government, all bodies to which the SPFM is directly applicable, including bodies sponsored by the Scottish Government, are required to have their core bank accounts with the OPG, except where Scottish Government's Treasury and Banking Branch (T&B) can be persuaded that the holding of such an account would not be cost effective. The core bank account should be used for the receipt of funding and the processing of all main payments and receipts. This principle does not preclude the use of commercial banks for processing transactions or the operation of local commercial bank accounts referred to in the section of the SPFM on Sub Accounts.

7. The principles underlying the operation of commercial bank accounts also apply to the operation of OPG accounts. Detailed guidance is available from T&B.

Operation of Commercial Bank Accounts

8. A commercial bank account should only be opened following the prior approval of T&B which will make a judgement based on the criteria set out in this guidance. Accounts should be opened in the name of the body concerned. If exceptionally - perhaps for security or operational reasons - an account is to be opened in the name of an individual, bodies need to ensure that the balance in the account shall, in the event of death etc. of the individual, vest in that person's official successor or revert to the body. It would be necessary to undertake a more intensive level of independent management checks than would normally be the case to ensure that payments and receipts are properly recorded and that the account is used only for authorised purposes.

9. Two signatures must be required to authorise payments from a commercial bank account. The bank will need specimen signatures of all members of staff authorised to sign cheques and other payments drawn on the account i.e. a panel of signatories from which a first and second signatory will be required for each transaction. The first signatory should normally be a permanent employee of a grade which routinely has managerial responsibilities and the second signatory a permanent employee of a more senior grade. Where payments are made by electronic methods organisations need to apply authorisation procedures which provide security at least as good as for the authorisation of cheques or payable orders. Instructions to make electronic payments should therefore require separate input and authorisation. In both cases described above and in line with UK Money Laundering Regulations staff who are authorised signatories may in some instances have to provide evidence to the bank of their home address and a copy of relevant identification e.g. a copy of passport or driving license.

10. Payments should be made by the most economical and secure method available. For most purposes the preferred payment method should be by BACS or by OPG transfer to other OPG account holders. Other methods of payment such as Sterling and Euro Clearing House Automated Payments System (CHAPS) are also available through OPG but should only be used where time constraints do not permit the use of BACS or OPG transfer. Where possible, remittance advice notes should also be sent electronically. In setting up a BACS system bodies should ensure that they are registered as a Grade 3 user with both BACS and the relevant sponsoring bank: this will ensure that payments are made directly from the account held at the OPG. Bodies must also ensure that transaction and file limits are set at an appropriate level and are recorded with the OPG. Advice on setting appropriate limits is available from T&B.

11. Bank statements must be reconciled to the body's accounting records, at least monthly. In addition statements should be examined periodically by a senior member of staff who is not involved at all in operating the account, to ensure that the account is being used solely for authorised purposes.

Balances

12. Balances in commercial bank accounts should be kept to the minimum consistent with the principles of not providing funding in advance of need and avoiding accounts being overdrawn. Guidance on the circumstances in which overdrafts would be permissible is included in the section on Borrowing, Lending and Investment.

Scottish Government Banking Contract

13. Where a body is covered within the scope of the Scottish Government banking contract they must use the contract. Exceptions must be agreed with T&B and will only be granted in terms of demonstrable value for money. In cases where a body falls outside the contract a competitive tendering exercise should be held to identify suitable local banking services and BACS sponsor.

Bank Charges / Interest

14. Specific charges for money transmission and other banking services should normally be subject to negotiation. This ensures that costs are transparent and assists comparisons between service providers. Contracts with banks should provide either for gross interest or, if this is not possible on the account in question, for a statement of the gross notional interest. Sponsored bodies in receipt of grant in aid may be required to offset any interest earned on public funds against future grant in aid needs. Any interest on commercial bank accounts operated by relevant bodies funded directly by the SCF would have to be surrendered to the UK Consolidated Fund via the Secretary of State for Scotland under the terms of a Designated Receipts Order.

Indemnities to Commercial Banks

15. Before issuing any indemnity to its bank a body should consult T&B who will consider in consultation with legal advisers as to whether the terms proposed are acceptable. In particular, the terms of the indemnity must not be too widely drawn and they must provide that the bank will remain liable for any acts of negligence or bad faith on its part. The body should also satisfy itself that it has the necessary authority to issue such indemnities.

Liability of Commercial Banks

16. A commercial bank may be liable for losses in relation to the operation of an account in circumstances where the bank is found to have acted negligently or in bad faith. Each case should be examined on its merits in consultation with legal advisers.

Fraud Prevention

17. Bodies should take appropriate steps to prevent fraud on their bank accounts and transactions. Fraudsters may try to take funds directly from bank accounts; redirect or intercept payments and receipts (e.g. by changing payees' names, addresses or account numbers); change amounts; or obtain payment when it is not due. See the section of the SPFM on Fraud.

Payments and Receipts

18. General guidance on payments and receipts is included in separate sections of the SPFM. Any enquiries relating to these issues should be directed to SEAS Operations and T&B respectively.

Foreign Exchange Cover

19. Most foreign exchange transactions in the interbank market are for "spot" delivery i.e. for delivery within the next 2 days. However, where it is known that foreign exchange will be required on a particular date in the future - perhaps several weeks or months ahead - the forward foreign exchange market can usually supply the currency. Such "hedging" services are aimed at minimising risk in future transactions. Consideration should be given to making use of the forward exchange market, where appropriate, particularly in relation to transactions exceeding £100,000. However, bodies should have sufficient expertise in foreign exchange and consult their banking advisers and/or the Bank of England before starting to use hedging services such as currency forwards - or "futures"- and options. Speculation must be avoided. For example, there should be no switching between the spot and forward markets according to expectations of future exchange rate movements; once a decision has been made to take forward cover for a certain category of payments or receipts, it should be adhered to. Forward contracts should not be made which are not related to specific future payments or receipts.

Paying by Direct Debit

20. Bodies should generally not accept direct debits to their accounts. Direct debits involve a loss of control, which is likely to be incompatible with the Accountable Officer's responsibilities for safeguarding public funds. However, in a few situations, direct debiting by a private sector body is a condition of the service provided by that body, and no alternative means of payment is offered. There may also be circumstances where, taking account of all the costs and benefits, it provides additional value for money to agree to pay by direct debit.

21. In such cases bodies should consult T&B about the need to open a separate bank account from where such debits can be paid. The balance on such an account should be no more than is needed to cover direct debits expected to be presented in the near future. The objective is to place a ceiling on the amount paid out by limiting the amount available for payment. Bodies should be notified beforehand of the amount of the debit, thus helping to protect the accountability for its funds and reduce the risk of fraud and error. They should also check as soon as possible that amounts deducted from their account under a direct debit are correct and in accordance with the amount notified beforehand, and they should contact their bank if there is a problem.

Accepting Credit & Debit Cards

22. Where cards are to be accepted for receipts, controls are also needed - for example, bodies should decide which issuers' cards to accept, whether to set a limit on the size of receipts for which they can be accepted, and what checks are required to ensure that cards are being used for their authorised purpose, within the authorised limits on the card, are valid, and are not stolen.

Reviewing Banking Operations

23. Banking operations should be regularly reviewed - a biennial review would normally be appropriate - and copies of the reviews submitted to T&B. Reviews undertaken by sponsored bodies should also be copied to the relevant sponsoring unit within the Scottish Government. A review should include an assessment of whether the arrangements meet the body's needs in the most economical, efficient and effective manner. Important issues which need to be borne in mind when adopting a banking strategy, and which therefore need to be reviewed from time to time, are:

whether it is making the best possible use of the different ways of making payments and collecting receipts offered by the OPG and commercial banks - in particular, whether electronic methods of transferring funds are being used cost-effectively and whether the use of expensive or vulnerable methods of payment is minimised;
whether payments are only made when they are due;
whether the terms negotiated with banks are competitive;
whether systems for providing information about payments, receipts and balances, and about whether banks are providing a satisfactory service, are effective and efficient;
whether arrangements to safeguard against fraud are effective;
whether arrangements for cash management are appropriate; and
whether organisational staff have adequate training, experience and knowledge.

Further Information

24. For additional information on this section of the SPFM please contact the Scottish Government's Treasury and Banking Branch (T&B) on 0131 244 7317, 7862, or 7322. You can also contact T&B by using the Banking mailbox: SGbanking@scotland.gsi.gov.uk.

Page Published / Updated: March 2008

The Scottish Government

Public Sector

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