POL00025783
POL00025783
Confidential and legally privileged draft
Initial Complaint Review and Mediation Scheme
Suspense Account - second response
Issue
Second Sight has raised the following question of Post Office:
“Could any SPMRs have been charged by Post Office Ltd for amounts that become
incorporated in suspense account balances that were subsequently taken into profit by POL or
any of its Counterparty Companies, or that remain as credit balances on the balance sheet of
POL or any of its Counterparty Companies?”
Post Office responded to this question in its paper of 29 July 2014. Second Sight has now
raised further questions on this subject.
Summary
Second Sight's principal concern is that credit amounts’ in the Suspense Account are
absorbed by Post Office as profit rather than being returned to branches to balance out losses
in those branches.
Whether the cost of the unresolved discrepancy between Post Office and a client (whether
held in the Suspense Account or otherwise) falls on a branch is not necessarily dependant on
the position between Post Office and its client but principally turns on the actions of the
branch in following, or not, the correct branch accounting process.
As set out in Post Office's previous paper, so long as a Subpostmaster submits the applicable
evidence from their branch's records to show there was no error on their part (ie. they have
followed the correct branch accounting process), Post Office will not charge that branch (or
will withdraw any related charge) arising from a discrepancy even where a client maintains
that there is a discrepancy.
Post Office's processes are therefore designed so that Subpostmasters are not
disadvantaged by the operation of its Suspense Account and, if operated correctly, Post
Office will not take into its own profit money that should have been credited to branches.
The Suspense Account
1 IThe Suspense Account’ is an accounting tool for temporarily holding disputed differences on
payments moving between Post Office and its clients. These amounts include not only
2 I differences on the transfer of "customer monies" to and from clients (such as bank account
3, 4,5 I deposits) but also differences on payments due byte Post Office to clients as the clients share
of commissions paid by customers forth it provides-to-clients (for example,
6 I commission share on travel insurance policies sold)due-to Post Office-on-the-sale of travel-
insurance).
7 I The operation of the Suspense Account in relation to holding disputed shares of commission
8 I to clientsthe payments for-services is outside the scope of this note and of the Scheme as
these payments do not affect branch accounting.
* Second Sight has made clear that it is only interested in credit amounts so they are the focus of this paper
2 There are in fact a number of different accounting ledgers that hold sums in suspense for different clients, products
and services but for the sake of this paper we refer to them collectively as the Suspense Account.
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Rit
The suspense account only holds the difference that is disputed. Eg. if POL thinks we
owe £100 and the client says £80 then the suspense account holds £20. On first
reading I read the wording as possibly inferring all £100 was held in suspense. On
second reading I decided it was OK. Can I just check your understanding to ensure
that you are clear it is the difference of £20 which goes in here. I think I would prefer
it if you added the words “disputed differences on” in front of “the transfer of
customer money” and in front of “payments due by Post Office”
Rod Ismay, 22/01/2015 03:43 PM
POL00025783
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Confidential and legally privileged draft
The operation of Post Office's Suspense Account is not a discrete issue that can be examined
in isolation. It is just one mechanism in a wider range of reconciliation processes used to
identify, assess and correct discrepancies between accounting records held by branches,
Post Office and clients.
The question posed by Second Sight is very general. It potentially relates to all the products,
services and relationships that Post Office manages, each of which has a different operating
and reconciliation process. Providing one universal explanation of how the reconciliation
processes (including the operations of the Suspense Account) work in practice is not possible
given all these permutations.
Nevertheless, this paper endeavours to further explain the broad principles behind the
operation of the Suspense Account. It also includes a few illustrative examples of those
principles in action.
Credits to the Suspense Account
Second Sight has asked Post Office to focus on credits in its Suspense Account. In relation to
branch accounting, a credit to the Suspense Account can occur in two ways:
. Transactions initiated in a branch which result in Post Office paying money to a client
(eg. a customer pays a utility bill at a branch and Post Office pays a sum to the value
of the bill to the utility company client).
A credit will occur when the records on Horizon (as generated by a branch) show that a
greater amount is due to the client than the client's records show, leading to a client
refusing to accept the extra amount. If the discrepancy over the extra amount is not
resolved in short order, it may then be moved to the Suspense Account as a credit.
. Transactions initiated in a branch which result in Post Office receiving money from a
client (eg. where a customer withdraws cash from their bank account at a branch and
the client bank then reimburses Post Office to the value of the withdrawal).
A credit will occur when the records on Horizon (as generated by a branch) show that a
smaller amount is due from the client than the client's records show, leading to the
client paying an extra amount to Post Office which Post Office does not consider to be
due. If the discrepancy over the extra amount is not resolved in short order, it may
then be moved to the Suspense Account as a credit.
Credits in the Suspense Account that remain unresolved for 3 years are moved to the Post
Office P/L Account — effectively Post Office absorbs these credits as profit. The operation of a
suspense account in this way is standard practice for most businesses.
Second Sight is concerned that an unresolved positive ‘discrepancy in Post Office's favour at
the client level may be placed in the Suspense Account as a credit and then be absorbed as
profit by Post Office when in fact it reflects a loss in a branch and should therefore have been
returned to the branch to balance out that loss.
Whether a positive discrepancy arising from a client reconciliation (or part thereof) is returned
to a branch depends on a number of factors: the nature of the underlying error/dispute,
whether a transaction correction has already been issued to a branch, whether the branch has
disputed the transaction correction (so that it has been withdrawn or suspended), etc.
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Page 2 Comments
RI2 Wouldn’t it be better to use CREDIT throughout as that is the phrase SS have used
too.
Rod Ismay, 22/01/2015 04:01 PM
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Confidential and legally privileged draft
9 I The general principles followed by Post Office when considering whether to return a positive
10 I discrepancy to a branch is to make an enquiry with the branch and explain the difference that
has been identifiedare:
ul 1
12 2. If upon FSC explaining the particular difference to the branch, the branch confirms or
realises that they made an error in accounting and are able to explain that, then FSC
would return the credit to the branch
13 3. Ifthe branch locates missing paperwork or is otherwise able to help identify the
impacted customer (to whom the credit relates) then FSC will make the necessary
payment to the client with the details of the customer
14 4. Ifa branch has followed the correct accounting process in branch (which means that.
the branch's accounts will balance with no gain or loss (except where other unrelated
issues cause a gain or loss at the same time), then Post Office will bear the loss
resulting from a discrepancy between the branch records and the client 's records.
15, 16 5. If.an error has been made in branch, whereby the branch did not take enough money
from the customer or gave too much money to the customer, compared to the
recorded value of the transaction then pursuant to the terms of the Subpostmaster
17 Contract the branch is liable for any loss arising from that error. Formal escalation
processes are in place for banking miskeys to enable Post Office to seek customer
acknowledgement via their bank to recover keying errors and these are typically
successful with the goodwill of the customer, but in the extreme situation where the
customer refuses or where the branch does not realise it has made a mistake then
there would not be a credit centrally to be returned to the branch and the branch
would in that extreme have to make it good-and-hi itl tto-h y
18 I Where the position i r Post Offi in-a Subpostmaster's f that-th:
by hh: folk d-th, +
g-P ;
In line with these general principles, Post Office will assess whether any positive discrepancy
should be returned to a branch before moving that discrepancy into the Suspense Account as
acredit. A credit put into a Suspense Account has therefore been determined, based on the
19, 20,21 I information available at the time, and the enquiries made, to either-be due to-Post Office-orto
22, 23 I a client_—itis-not-due-to a branch. The credit is held in the Suspense Account for 3 years in
case any further information comes to light (either from the branch, the client or a customer)
that allows the underlying discrepancy to be resolved. As such, when Post Office takes a
credit in the Suspense Account into profit after 3 years, it is not taking any money properly
due to a branch®.
The exact implementation of this rule varies from product to product so it is not possible to
describe a universal process map for how this happens. However, below Post Office has
explained how this works in relation to two types of transactions that are thought to be of
24 I particular interest to Second Sight._These are set out below.
3 Post Office may be taking into profit money that is properly due to a client but that is a matter between Post Office and
its client that does not affect the position of a branch
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Page 3 Comments
RI3 In this case there won’t be a loss to bear. It is a CREDIT (positive) difference from
POL point of view. Shouldn’t we say “....then Post Office will continue to hold the
credit in anticipation of an enquiry from the customer or client when they become
aware that the customer’s account has not been updated
Rod Ismay, 22/01/2015 04:09 PM
RI4 In this case there won’t be a loss to bear. It is a CREDIT (positive) difference from
POL point of view. Shouldn’t we say “....then Post Office will continue to hold the
credit in anticipation of an enquiry from the customer or client when they become
aware that the customer’s account has not been updated
Rod Ismay, 22/01/2015 04:18 PM
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Confidential and legally privileged draft
Before explaining these, Post Office also notes that credits in suspense are not a
consequence of actions by POL to issue charges to branches. Credits arise due to a
difference between how the branch recorded a transaction locally versus the downstream
summarisation of data or paperwork arising from those transactions. Assuming the branch
paid out or took in money to the same value as that of the transaction they recorded, then the
branch would balance and there would be no discrepancy or disadvantage to the branch. Ifa
difference arose where the client view exceeded the branch view, and if that did subsequently
lead to a charge from POL to the branch, then evidence would be provided and the branch
would be able to challenge the specific Transaction Correction.
[ The narrative in the sections titled “Summary” and “Client Reconciliation” of draft emailed on
29 July 2014 at 12.00 may be useful too ]
Example 1: Bank deposits
Post Office offers personal banking services to customers including allowing them to make
cash deposits into their accounts with their own banks.
Where the bank deposit is conducted using a paying in slip*, branch staff must manually enter
the value of the deposit on Horizon. The bank's record of the transaction is taken from the
paying in slip that is passed from branch to IPSL who act as the clearing agent and
intermediary to the banks for Post Office’to-the-bank.
One type of error in this process that can give rise a Suspense Account credit is where a
paying-in slip is lost before reaching IPSLthe-clientbank. Without the paying in slip, IPSL
dothe-barnk- may not know thate an amount has beente-be deposited byte a customer's
account nor the details of the customer's account to whom it should be credited. Without this
information, the bank will only request payment for the deposits notified by IPSL and Post
Office retains the difference in suspense pending enquiries with the relevant brancha-bank-wil+
This leads to the Horizon records showing a greater value of deposits (ie. payments due from
Post Office to the bank) than the bank's records. If the discrepancy (being the extra amount
I that is due to the bank when the customer is identifiedbutthe-bank refuses to-take) cannot be
resolved, it may be transferred into the Suspense Account as a credit.
In this scenario, on identification of the discrepancy and usually long before any credit is
moved to the Suspense Account, Post Office would contact the branch to see if they could
explain what happened with the particular deposit in question.®
If the branch has in fact conducted the deposit transaction correctly at the counter (ie. the
amount of cash taken from the customer equals the value of the transaction recorded on
Horizon by the branch) the branch's accounts will balance with no loss or gain. The resolution
of the discrepancy is therefore solely a matter between Post Office and the client bank. If,
down the line, the discrepancy is moved to the Suspense Account as a credit and then taken
into Post Office's profit after 3 years, this will not disadvantage the Subpostmaster.
4 This depends on the identity of the customer's bank. A minority of banks still require customers to use paying in slips;
most banks now use a chip and pin system.
5 This is actually Post Office's transaction handler.... ROD TO PROVIDE DETAILS
® This type of error is commonly resolved by the branch recognising that they had simply forgotten to remit out the
paying in slip.
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Page 4 Comments
RI5
What we discussed was an error in a deposit not a deposit when no deposit occurred.
I don’t think that would happen. What does happen is the situation of keying noughts
erroneously on the end of a deposit value. That is what leads to the miskey escalation
process that I added earlier in the note. For that reason I don’t think these last 4
paragraphs are right or are needed.
Rod Ismay, 22/01/2015 04:38 PM
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Confidential and legally privileged draft
pi
hy inf ti ilable-to Rost Offi the-bi hs ts-_that Id-shi
d it)-bringing- them ini ith the-bank. ds-and-thereb: ting-the-di
Pesit}, PRAIA ¥ is pancy-
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branch-d tidentify-th then-Post Offi hold-the-di it-in-it
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P g P 7 g Lid
Example 2: Cash dispensed from ATMs
Credit differences can arise on ATMs and are in respect of balancing errors and unidentified
retracts in the ATMs. In each case, branch by branch, Post Office FSC would contact the
branch to explain that the bank had reported a different dispensed value to the one recorded
by the branch in Horizon.
The bank would not be aware that a retract had happened until a customer or branch flags an
issue. The value recorded by the bank would therefore be the total intended to be dispensed.
not reflecting that some had been retracted.
If the branch had had identified and accounted for retracts then a difference would arise and
would be proper to be there. The branch books, in that case, would properly align to the cash
on hand and it would be evident to all that there was a customer retract to be resolved. That
value would then be held in suspense pending resolution with the customer. If, however, the
customer never came forward or could not otherwise be identified then the value would
ultimately be released to profit.
I Itwould not disadvantage a Subpostmaster.
Given the impracticality of identifying and narrating every transaction in these accounts, we set
out below two examples of specific clients where Post Office has released credits to Profit & Loss.
In both cases we do not consider that a branch would have been disadvantaged and we explain
why.
Personal Banking its
Branches take cash deposits on behalf of customers of a wide range of banks. Some banks
have a VocaLINK relationship with Post Office and the deposits can be processed by way of the
customer inserting their debit card in the pinpad. Some others (typically banks that Post Office
has worked with a long time) have not migrated the Post Office relationship to LINK and so the
branch has to take a paying in slip from the customer.
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Such paying in slips are then sent to IPSL for processing. This then initiates the settlement.
proposal from which Post Office makes payments to the relevant banks.
If the paying in slips are not despatched by the branch to IPSL or if branches take card based
deposits for non VocaLINK enabled banks, then there will not be payment request initiated for
Post Office to pay the relevant bank.
It means Post Office has a credit in its accounts, which needs paying to the bank but where the
relevant customer information is missing and so it would end up in suspense at the bank if it
were paid over.
On the basis of the IPSL view of the data, Post Office makes a lower settlement to the relevant
bank than the Horizon data would suggest. Post Office then, however, seeks to identify who
the impacted customer is in order that the difference can be paid as soon as possible to the
bank with the relevant details for the bank to update the correct customers account.
The branch is not impacted by this. So long as the branch keyed the value of the deposit
correctly (consistently between the paying in details and the cash taken) then there is no
scenario that the branch would become disadvantaged. It is the customer who is at risk of
being disadvantaged.
Post Office FSC match the data from IPSL against the deposit data fed through from Horizon to
try to identify the originating branch in order that the paperwork may be located or that the
branch may recall the customer in question.
In the event that these enquiries do not identify the customer then Post Office can do no
more. There would be no case of a TC being sent to a branch. The understanding would be
that the branch had properly accounted for the deposit. It is a downstream issue that has
failed to ensure the bank updates the customer’s account.
The narrative for this response should also be validated with Greg Lewis in Financial
Services in respect of bank relationships.
Aon Commission Creditor
The largest amount taken to profit by far in the 4 years reported on is in respect of Aon. This
had nothing to do with branch accounting, it was wholly independent of whether branches
may have taken wrong payments from customers and it did not lead to any TC’s.
The client contract with Aon had complex pricing arrangements within it. This led to a
difference of opinion between Post Office and Aon as regards the commission which was due
from Post Office to Aon for policies sold.
Post Office initially paid a lower amount based on the initial Excel based pricing model that
was developed for the new contract. However, further analysis revealed that additional
payments may need to be made. A separate paper is available on this.
Post Office then posted an accrual for potential extra payments, but after wider commercial
negotiations with Aon, a lower amount was agreed. The residual value of the accrual was
therefore moved to Client Suspense and subsequently released to profit.
POL00025783
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60 Given that Post Office had previously taken a cautiously higher cost to P&L in anticipation of a
higher payment to Aon, the release (3 years later) effectively offset an earlier loss borne by the
company.
6l There was no impact on Subpostmasters.
62 I
These examples support Post Office's general position that Subpostmasters are not
disadvantaged by the operation of the Suspense Account if they act in accordance with Post
Office's policies and procedures. It is recognised that these are only two examples but as can
be seen above, the number of permutations and types of errors is vast. If Second Sight has
concerns over the operation of the Suspense Account in relation to specific transactions or
circumstances then Post Office will be happy to look into this in more detail.
Suspense Account data
As requested, enclosed with this paper is a spreadsheet showing all amounts taken from the
Suspense Account into profit over the last 4 years. The figures in the spreadsheet include
both "customer monies" and payments for services as described above. Each line item may
represent a single unreconciled transaction or series of unreconciled transactions.
4A_30099970_1 7
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