1. This section gives guidance on the banking arrangements that should be adopted by all bodies to which the Scottish Public Finance Manual (SPFM) is directly applicable, including the constituent parts of the Scottish Administration (i.e. the core Scottish Government (SG), the Crown Office and Procurator Fiscal Service, SG Executive Agencies and non-ministerial departments) and bodies sponsored by the SG.
2. All bodies to which the SPFM is directly applicable, including bodies sponsored by the SG, are required to have their core bank accounts with Government Banking, except where the SG's Treasury and Banking Branch (T&B) can be persuaded that the holding of such an account would not be cost effective.
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.
Government banking contract
6. The Government Banking contract is a UK-wide framework managed by H M Revenue and Customs. Each application to open a new bank account under the framework must be approved in advance by H M Treasury.
7. Each new bank account opened under the framework is expected to join H M Treasury’s Cashflow Management Scheme, which is managed by the Exchequer, Funds and Accounts (EFA) Team, unless the applicant can persuade the EFA Team otherwise. Treasury & Banking Branch (T & B) is responsible for operating the Scheme in Scotland.
Scottish Government banking contract
8. The Scottish Government Banking Services Framework is a contract managed by the Scottish Government, and is designed to supplement the Government Banking contract. Where a body is covered within the scope of the SG banking contract it 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.
Opening of government banking accounts
9. Funds held in bank accounts with Government Banking have the effect of maximising funds available to the UK Exchequer, thus reducing the cost of government borrowing to fund cash deficits or increasing government income from interest earned on cash surpluses. In order to maximise the benefits to government, all bodies to which the SPFM is directly applicable, including bodies sponsored by the SG, are required to have their core bank accounts with Government Banking, except where the SG'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.
10. Apart from prior approval by H M Treasury to open a Government Banking bank account, the procedures for opening Government Banking and commercial bank accounts and applying for related services such as BACS registration and access to electronic banking follow the same pattern.
Opening of commercial bank accounts
11. A commercial bank account should only be opened where there is a distinctive business need that cannot be met by the Government Banking bank account or where there is a separate contractual reason for doing so. 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.
Opening of bank accounts – other requirements
12. Where the applicant for a Government Banking or commercial bank account is a new customer of the bank, the bank is required under various statutory fraud prevention and anti-money laundering provisions to carry out due diligence prior to acceptance of the applicant as a customer.
Operation of bank accounts
13. The principles underlying the operation of bank accounts apply to both Government Banking and commercial bank accounts.
14. A panel of authorised signatories for a bank account is created as part of the procedure for opening that bank account (the bank mandate), which also specifies the rules that apply to the signatories e.g. number of signatories required, whether there are different groups of signatories and if so what authority each group holds. Bank signatories may be required to authorise payments and to authorise other banking services in relation to the account, such as enabling the account to process BACS payments, granting access to electronic banking services and enabling receipt of debit and credit card payments.
15. Two signatures must be required to authorise payments from a 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 that provides security that are at least as robust as for the authorisation of cheques. 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.
16. Inter-departmental transfers are an electronic payment method provided under the contract to Government Banking customers. Payments between Government Banking bank accounts must be made by means of inter-departmental transfer, with the exception of H M Revenue and Customs and the Driver and Vehicle Licencing Agency, where payments should be made by BACS.
17. Payments should be made by the most economical and secure method available. For most purposes, the preferred payment method should be by BACS (Bankers Automated Clearing System) or by inter-departmental transfer to other Government Banking account holders. Other methods of payment such as Clearing House Automated Payments System (CHAPS) and Faster Payments are also available through Government Banking, but should only be used where time constraints do not permit the use of BACS. Foreign currency denominated payments are also available. 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 Government 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 Government Banking. Bodies must also ensure that transaction and file limits are set at an appropriate level and are recorded with Government Banking. Advice on setting appropriate limits is available from T&B.
18. 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.
19. 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.
Bank charges and interest
20. Customers of the Government Banking contract and the Scottish Banking contract are subject to the tariffs for bank charges and interest on these respective contracts. Applications for interest-bearing Government Banking accounts are subject to acceptance of a business case made by the applicant to H M Treasury.
21. 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. Any interest on commercial bank accounts operated by sponsored bodies may be used to provide additional spending power subject to it being included in the approved budgets of the bodies. Any interest on commercial bank accounts received by an office-holder in the Scottish Administration would have to be surrendered to the UK Consolidated Fund via the Secretary of State for Scotland under the terms of the Designated Receipts Order.
Indemnities to commercial banks
22. Before issuing any indemnity to its bank, a body should consult T&B, which 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. Bodies should also be satisfied that they have the necessary authority to issue such indemnities.
Liability of commercial banks
23. 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.
24. 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
25. General guidance on payments and receipts is included in separate sections of the SPFM. Any enquiries relating to these issues should be directed to the SEAS Service Desk.
26. Bodies may require to conduct some banking operations in a currency other than sterling. In most cases, this will involve processing receipts or payments denominated in a foreign currency. It is also possible to open and operate foreign currency bank accounts. Both the Government Banking and Scottish Government banking contracts include provision for foreign currency transaction processing and bank accounts. The same principles apply to foreign currency banking transactions as to sterling ones: core banking activities fall under the Government Banking contract unless Treasury & Banking can be persuaded otherwise.
27. Receipts denominated in a foreign currency may be converted to sterling and credited to a sterling bank account. Similarly, a payment may be made in a foreign currency, converted to sterling and debited to a sterling bank account. For Government Banking customers, there are certain procedures in place for a foreign currency transaction in the latter category, depending on the type and value the transaction. The most common are “spot” payment transactions, where the foreign currency for the payment must be purchased from Government Banking (sterling equivalent value under £2 million) or the Bank of England (sterling equivalent value over £2 million). At least two working days’ notice is required. It is also possible to buy currency “forward”, which applies where one or more specific foreign currency payments are required to be made in the future, perhaps weeks or months ahead. The aim of forward contracts is to provide certainty about the exchange rate at which the future payments will be converted into sterling. Forward contracts must be agreed in advance with Government Banking, regardless of value. Care should be taken when using “spot” and “forward” services to avoid speculation. Various other financial instruments such as options are available to manage the exchange risk of operations in foreign currencies. Such instruments are normally not available to Government Banking customers. Bodies considering the use of financial instruments should contact Treasury & Banking.
28. Where there is a demonstrable business need to do so, bodies may open and operate bank accounts denominated in foreign currencies – for example, where funding for particular categories of payments, and the payments themselves, are denominated in a foreign currency. In these cases, receipts and payments may be processed without conversion into sterling, and the “spot” payment procedures outlined above will not apply. However, these procedures will apply to any transaction relating to the bank account that does involve conversion into sterling, such as buying currency to fund the account. The Government Banking contract provides for the opening of euro-denominated bank accounts. Please contact Treasury & Banking for further advice.
Paying by direct debit
29. Bodies should generally not accept direct debits from 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. If direct debits are accepted from a Government Banking bank account, the account should be checked on a daily basis to ensure that only approved debits are being taken.
30. If direct debits are to be accepted from a commercial bank account T&B should be consulted 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.
Collection of receipts by direct debit
31. Where there is a business requirement to accept regular payments from entities, doing so by means of collection of receipts by direct debit may be an option. Application must be made to the BACS sponsor, and is subject to their approval. Guidance is available from the BACS sponsor, which for customers of the Government Banking and Scottish Government banking contrasts should be contacted via T&B. Direct debit receipts collected by customers of these contracts should be credited to a Government Banking bank account.
Accepting credit and debit card receipts
32. Where credit and debit cards are being accepted as a method of payment (known as merchant acquiring), the Government Banking account should be used. This service is available under a separate contract let by the Crown Commercial Service, which is accessible by Government Banking customers. In all cases, there is a need for the recipient body to decide which issuers' cards to accept and whether to set a limit on the size of receipts. Guidance on security and other relevant matters is available from the service provider - which should be contacted via T&B.
Reviewing banking operations
33. Banking operations should be regularly reviewed - a biennial review would normally be appropriate. Bodies that are part of the Scottish Government banking contract should undertake such reviews in consultation with T&B. A review should include an assessment of whether the existing arrangements meet the body's needs in the most economical, efficient and effective manner. Important issues which need to be borne in mind are:
- whether it is making the best possible use of the different ways of making payments and collecting receipts offered by Government Banking 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.
Page updated : July 2020