BILLS OF EXCHANGE (AMENDMENT) BILL

Order for Second Reading read.

The Second Minister for Finance (Mr Lim Hng Kiang): Mdm Deputy Speaker, I beg to move, "That the Bill be now read a Second time."

The Bills of Exchange Act provides the legal framework of bills of exchange, cheques and promissory notes. It was last amended in April 1998.

This Bill seeks to amend the Act for the purpose of establishing a Cheque Truncation System, or CTS in short.

Overview of Cheque Truncation System (CTS)

Let me begin by giving an overview and benefits of the Cheque Truncation System. Singaporeans have written an average of more than 83 million cheques a year over the last 10 years. In 2001, the figure was 92 million. Significant costs are incurred by the banking industry to clear these cheques. Today, after a bank's customer deposits a cheque at his bank, also referred to as the presenting bank, the bank will batch it together with other cheques and transport them to the Automated Clearing House. The Clearing House then sorts the cheques for the respective paying banks to collect, whereupon each paying bank verifies whether the cheques can be paid. If the cheque cannot be paid, it is then returned to the presenting bank in the same way.

Over the years, the banking industry in Singapore has introduced new technologies to improve this cheque clearing process. An example of this is the magnetic-ink character recognition (MICR) information on cheques that banks have been exchanging to facilitate faster cheque clearing. However, physical cheques are still required by the paying bank because they need to verify information such as dates and signatures on the cheques.

The Cheque Truncation System, to be launched later this year, leverages on new imaging technology that enables banks to exchange electronic images of cheques. Cheques will be scanned when deposited and their electronic images will be transmitted throughout the entire clearing cycle. The new system will use a private network with public key cryptography to ensure that images are encrypted and transmitted securely between banks. In addition, the system includes a centralised image archive for banks to store and retrieve cheque images. Since a cheque image contains all the necessary information required by a paying bank to determine whether the cheque can be paid, there is no longer an operational necessity for them to have the physical cheque.

This Bill contains amendments to allow banks to present a cheque by electronic means in place of physical presentment. This Bill will also recognise the rights of a holder of an Image Return Document, or IRD in short, which is a document that banks will issue instead of returning the original cheque when a cheque is dishonoured. The amendments have been drafted so that under the new process, the respective rights and duties of the various parties to a cheque will be the same as at present.

Other jurisdictions have passed, or are in the process of passing, similar amendments to their cheque legislation. The United Kingdom has allowed the clearance and payment of cheques using magnetic-ink character recognition information instead of physical presentment since 1996. In the United States, the Federal Reserve Board is in the process of getting Congress to enact a Check Truncation Act.

Let me now explain the proposed amendments in detail.

Allowing electronic presentment to replace physical presentment

Clause 6 of the Bill introduces section 87A that will allow the presentment between banks to be done through electronic transmission of cheque image and payment information instead of the physical cheque. However, the paying bank will still have the right to demand that the physical cheque be presented instead, if it deems it necessary.

Image Return Document (IRD)

Clause 6 also introduces section 87B, which will allow for the presenting bank to issue an Image Return Document (IRD) instead of returning the original cheque to its customer if the cheque is dishonoured by the drawer's bank. An IRD is a banking document bearing the image of the cheque together with other related information. However, if the customer requires the original cheque, he or she can still request it from the bank. The bank may also choose to return the original cheque instead of issuing an IRD. If the holder of the IRD deems that the reason for the original dishonour is no longer valid, for instance, the original cheque was post-dated or the account had insufficient funds, this holder can present the IRD for payment at the same presenting bank as if the IRD were the original cheque. The Bill also gives a person who has lost an IRD the same rights of recourse against the drawer that are currently available to a person who has lost a cheque.

Clause 3 amends section 49 to allow an IRD to serve as a notice of dishonour to the drawer of the cheque, as per a dishonoured cheque in today's context. The holder of the IRD will be able to use the IRD to notify the drawer that the cheque has been dishonoured. The holder can then request for a new cheque from the drawer if necessary.

Clause 4 amends section 86 of the Act to clarify that the new cheque truncation provisions in the Act that are applicable to cheques will also apply to other instruments such as cash cheques and banker's drafts.

The addition of section 87C of the Act will allow the Monetary Authority of Singapore (MAS) to make regulations relating to cheque truncation with the approval of the Minister. MAS intends to prescribe via regulations, the electronic payment information required when a cheque is presented electronically and the particulars contained in an IRD.

The Bill has incorporated the various comments that MAS has received through consultation with public bodies.

Conclusion

Mdm Deputy Speaker, the Cheque Truncation System will enhance the banks' efficiency by reducing transportation and microfilming costs, thus allowing banks to offer new services to customers. The amendments in this Bill will enable banks to keep up with technological changes and help Singapore move to a more efficient payment system.

Mdm Deputy Speaker, I beg to move.

Question proposed.

Mr Low Thia Khiang: Mdm Deputy Speaker, I understand that under the Cheque Truncation System, the physical cheque is deposited with the presenting bank but is no longer transported physically to the paying bank for verification. Instead, the cheque is scanned electronically into the CTS and the image is transmitted to the paying bank for clearance. At the paying bank's end, the signature would be verified based on the electronic image of the scanned cheque and the customer's specimen signature. If the signature tallies, the presenting bank will be notified and funds will be paid to the payee's account. If a cheque is dishonoured, the original cheque need not be returned unless it is requested. Instead, an electronic image of the dishonoured cheque will be given back to the holder.

I understand that we are the first in the world to adopt this system. My concerns are: is it secure? Are there adequate safeguards against electronic frauds? Under the current paper-based system, cheque frauds can be committed when someone gets hold of the physical cheque and forges the signature, figures, etc, and the officer at the paying bank did not detect the physical discrepancy.

Under the CTS, I would like to know firstly, how foolproof are the safeguards against hacking? Is it possible for outsiders to hack into the system, steal images of signatures and scan them into other documents?

Secondly, what systems are in place in the banks to ensure that there is no internal fraud, for instance, to prevent employees, who are authorised to handle archived signatures, from misusing the signatures and misappropriation?

Thirdly, will verifying against an electronic image be less accurate than verifying against an original cheque? I suppose that for any kind of electronic image, it is more or less not as accurate as the original one.

Fourthly, who is making the decision whether to clear the cheque, ie, whether the signature matches the specimen that the customer has with the bank? Is it by a human being, like a bank officer, or is it automated? If it is automated, then how stringent are the criteria for matching as opposed to human judgment? If it is more stringent, then it will lead to dishonouring of cheques caused by variation in the customer's signature due to natural process. We all understand that our signature may not always be the same. If it is less stringent, then the system is less safe than the current system. Will the banks be underwriting the customer's losses under CTS?

Mdm Deputy Speaker, I would also like to know what evaluation system has been conducted to ascertain that it will work. What is the confidence level of the result of this evaluation, because we are changing to quite a drastic system of clearance?

Mr Lim Hng Kiang: Let me congratulate the Member for displaying a tremendous knowledge of the system. First of all, although Singapore may be the first country to adopt this system as a whole, because we are a small country, it is therefore easy for us to implement. But in many countries, this system is implemented by a group of banks or within a state. He is partially right that we are the first country to adopt this system nationally. But this technology and practice is fairly widespread between groups of banks or within states. As I mentioned in my speech, countries like the UK or US are already progressing to make this a national system.

I agree with him that security is of paramount importance to the Cheque Truncation System. I can assure Members here that much effort has been put in to ensure that the infrastructure is fully trusted and secured. The cheque images that are captured at the point of deposit are sealed and encrypted before they are transmitted, and therefore they are tamper-proof. The presenting bank will also take the responsibility to ensure that the scanned cheque images are of sufficiently good quality for the paying bank to rely on for cheque verification. The whole idea of this system is that we are handling more than 80-90 million cheques and we need very good technology for the images for verification and automation. But, at the same time, we must make sure that the customers have confidence in the system and, to do so, the system that the banks have put together has to comply with international standards of security and of encryption.

The signature matching is done by matching the images and the specimen signature. Human intervention is avoided unless there is a controversy. The Association of Banks, in implementing this system, has taken relevant steps to bring this system progressively. This has been worked on for many years. We started in the middle of this year, and it will only be fully implemented around October this year. They have gone through the system. They have verified it. I agree with the Member that security is of the utmost importance, so that people have confidence in the system.

Mr Low Thia Khiang: Do the banks underwrite to cover losses of customers if there is a problem with the CTS?

Mr Lim Hng Kiang: If there is any doubt with the cheque and it is dishonoured and sent back to the original drawer, then, of course, the person can verify whether the reason for the dishonoured cheque is valid or not - whether it is because of the date, insufficient funds or that the signature does not match, in which case he can go through the same processes today to get the drawer to re-issue the cheque. I do not think the processes of writing cheques and verifying cheques have changed by the process of introducing this new system. This is just a way of using technology to replace the human verification that goes on today in our automated clearing system.

Mr Low Thia Khiang: I am referring to a case of forgery.

Mr Lim Hng Kiang: As I said, the system has not changed compared to present practices. If there is a forgery or fraud and there is an investigation, then the investigation will determine who is at fault in the forgery or fraud.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - [Mr Lim Hng Kiang].

Bill considered in Committee; reported without amendment; read a Third time and passed.