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Complaint Review and Mediation
Scheme
Reply of Post Office Limited to Second Sight's Briefing
Report - Part Two
March 2015
DRAFT
This Reply is confidential and is not to be disclosed to any
person other than a person involved in the processing of
Applicants' claims through the Scheme
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Contents
Introduc’
This Reply. ese cece eee eee eee eee e eee eee e ee ee ee beeen eee e enn ee 5
Overview of Post Office's position..
Post Office's response to section 1 - Introduction......eece eee eee eee eee 9
Post Office's response to section 2 - Limitation of Scope in Work Performed 11
Post Office's response to section 3 - Risk Transfers... see. see eee eee eee ee 14
Post Office's response to section 4 - structure and content of the report..19
Post Office's response to section 5 - ProceSS... sees eee cece eee cence eens 20
Post Office's response to section 6 - Scope...
Post Office's response to section 7 - The Contract between Post Office and
Subpostmasters........ese sees
Post Office's response to section 8 - Automated Teller Machines (ATMs) .....26
Post Office's response to section 9 - Motor Vehicle Licences.. . 20 35
Post Office's response to section 10 - Foreign Currency Transactions....... 36
Post Office's response to section 11 - National Lottery.........eseeeeee eee 37
Post Office's response to section 12 - Training, Support and Supervision... 40
Post Office's response to section 13 - The Helpline....... cee cee e eee eee ee 43
Post Office's response to section 14 - Limitations in the Transactional
MBUdit Trail". cece cece cece cece rece ene eeerenee tee e cee er cece cerececeeeeses 46
Post Office's response to secti
Subpostmaster or their Staff..
Post Office's response to section 16 - Transaction Reversals......-.eeeeeee
Post Office's response to section 17 - Cash and Stock Remittances (Rems) in
and out of the branch. ceeeeeeeees : : : eee 52
Post Office's response to section 18 - Missing Cheques... : a +54
Post Office's response to section 19 - Pensions and Allowances............4 59
Post Office's response to section 20 - Surpluses..........e eee cess eee eee ee 63
Post Office's response to section 21 ~ Counter-errors that benefit customers
at the expense of the Subpostmaster........e cece cece cence eee eee eee eens 65
Post Office's response to section 22 - Error and fraud repellency and
Horizon’s ‘fitness for purpose’
Post Office's response to section 23 - One-sided transactions.
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Post Office's response to section 24 - Hardware issueS.........seeeeeeeeeee 76
Post Office's response to section 25 - Post Office Audit Procedures........ 17
Post Office's response to section 26 - Post Office Investigations .78
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Introduction
1. As part of the Complaint Review and Mediation Scheme (the
Scheme), Second Sight was engaged as a firm of forensic
accountants to provide a logical and fully evidenced opinion on
the merits of each Applicant's case.
2. On 21 August 2014, Second Sight's Briefing Report - Part Two
(the Report) was sent as a confidential document to a number of
Applicants and their advisors, as well as to Post Office. The
purpose of the Report was to describe and expand on common
issues identified by Second Sight as being raised by multiple
Applicants (a thematic issue), the aim being to provide general
information that could then be applied in specific cases.
3. Post Office was unable to endorse the Report. In the interests
of transparency and with the overriding aim of assisting the
resolution of complaints brought under the Scheme, Post Office
prepared a Reply in order to correct inaccuracies in the Report
and to provide information that the Report did not. This Reply
was dated 22 September 2014 and sent to Applicants.
4. Within the first iteration of the Report, a number of issues
were said by Second Sight to remain under investigation. Second
Sight subsequently issued to Post Office a final version of the
Report on XX March 2015.
5. Though Post Office has engaged directly with Second Sight to
help analyse what it terms ‘thematic’ issues and provided
comprehensive information and explanations in relation to its
processes, the Report still lacks supporting evidence, examples
or statistics to substantiate many of the conclusions drawn.
6. Although Applicants have raised a number of issues that relate
to similar parts of the Post Office’s business, having
investigated those cases thoroughly, it is evident those issues
turn on the individual circumstances of each case. They cannot,
therefore, be said to be ‘thematic’ issues. Further, Second
Sight’s ‘thematic’ issues are based upon the views expressed by
0.03% of the 500,000 people within the Post Office network that
have used the Horizon system since its introduction.
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7. As a result, Post Office remains unable to endorse the final
version of the Report and has therefore updated this Reply in
order to correct errorsand provide additional and relevant
information that the Report omits. The body of this Reply
provides Post Office's detailed comments on each section of the
Report.
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10.
This Reply
It is recommended that the reader familiarises themselves with
Second Sight's Briefing Report - Part One (the Part One
Briefing) which provides background information on Post Office's
processes and procedures. This Reply builds on the information
in the Part One Briefing.
Care should be taken when seeking to apply the Report’s findings
and this Reply to individual cases since the extent to which
they may or may not apply will very much depend on their
specific circumstances.
In this Reply:
. Report means the final version of the Report unless stated
otherwise.
° Reply means this latest version of the Reply unless stated
otherwise.
° References to paragraphs and sections are to paragraphs and
sections of the Report unless stated otherwise.
e ‘Applicant’ means an applicant to the Scheme whereas
‘Subpostmaster’ means Subpostmasters in general, whether or
not they have applied to the Scheme.
° For ease of reference, where reference is made below to
‘Subpostmasters’ or ‘Applicants’ taking action in a branch,
this action could, in most circumstances, also be taken by
a Subpostmaster's assistant.
° All other capitalised terms are defined in the Part One
Briefing.
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Overview of Post Office's position
11.Nearly all Applications to the Scheme centre on there being a
loss of cash from a branch that the Applicant does not consider
that they caused or are liable for. The purpose of this Reply is
to help identify those issues that can cause such a loss and
those that cannot.
12.In order to identify a loss of physical cash, an investigator
needs two pieces of key information:
a. How much cash should be in the branch as a result of the
transactions processed in the branch. This information is
provided by the branch accounts stored on Horizon.
b. I How much cash is actually in the branch. This is known by
conducting a physical count of the cash on hand.
13.Any difference between the above two figures generates a
‘discrepancy’ which may either be a shortage or a surplus.
Controlling the branch accounts
14.I1f cash is missing, the first stage of the investigation is to
identify the day on which the cash went missing. The
transactions for that day can then be reviewed for anomalies
(see section 10 of the Part One Briefing) e.g.:
° Transactions incorrectly recorded (such as withdrawals
being recorded as deposits);
e Values incorrectly entered (e.g. entering £2000 instead of
£200).
15.This is done to determine if the branch has made errors that
would make the branch accounts inaccurate. This review must be
done by the branch staff as only they will know the transactions
performed on that day and may recall the correct transaction
details. Many branch errors (including the two examples above)
are most easily identified in branch. They would not be evident
to Post Office unless, for instance, a complaint was made by a
customer.
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16. Post Office helps correct branch errors where possible by
reconciling Horizon records against data collected on some
transactions by third parties such as banks and government
departments. Where Post Office detects an error through this
reconciliation process, it issues a Transaction Correction to a
branch notifying them of the error and requiring an adjustment
to the branch accounts.
17.It has been alleged by some Applicants that they have received
Transaction Corrections even when they were not at fault.
Transaction Corrections are only issued where there is clear
evidence of an error in branch. Where the cause of loss rests
with Post Office or a third party client, Post Office absorbs
that cost and it is not passed back to the branch. This
principle underlies the design of Horizon and all Post Office's
back office and reconciliation processes.
Controlling cash movements
18.Save when it conducts an audit, Post Office does not have any
direct knowledge of what physical cash is actually in a branch —
only Subpostmasters have this information. For this reason,
branches are required to:
e Count the amount of cash in the branch daily and record
this figure on Horizon as a cash declaration.
° Count all cash and stock at the end of each trading period
and record these figures on Horizon before making good any
discrepancies’.
19.I1f daily cash declarations are not made by a branch or
declarations are made falsely (by declaring that there is more
cash in the branch than there actually is) then it is impossible
for Post Office, and will be very difficult if not impossible
for a Subpostmaster to:
° Know if cash is missing;
. Identify the day or days on which cash has gone missing;
1 See paragraph 8.8 of the Part One Briefing regarding "making good" errors.
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. Identify which member of staff may be the source of errors;
or
. Locate the erroneous transactions that caused a loss.
20.Daily accurate cash declarations are the most critical aspect of
branch accounting. Where these are not performed, losses of cash
go unchecked.
21.For this reason, it is critical that Subpostmasters make
accurate daily cash declarations as a fundamental requirement of
their contract with Post Office. Subpostmasters habitually
failing to make cash declarations may find their contracts
terminated. Post Office also prosecutes those Subpostmasters
who dishonestly make false cash declarations. It is not an
excuse to say that a Subpostmaster was poorly trained or
received inadequate support in this regard. The need for daily
cash declarations is known by all Subpostmasters and is easily
done - there is no specialist training or support required.
Post Office does not accept that there are any circumstances
capable of justifying the commission of the criminal offence of
rendering a false account.
22.In the context of the Scheme, there are a number of cases where
accurate cash declarations have not been made. Many of these
Applicants have challenged Post Office to identify the cause of
losses in their branches which they had hidden by falsely
accounting. As explained above, identifying the specific source
of the losses is not possible where an Applicant has failed to
follow the simple but critical task of making accurate daily
cash declarations.
23. Subpostmasters are contractually liable for any losses hidden or
caused by their inaccurate record keeping whether due to error,
dishonesty or otherwise. It is also a well-established common
law principle that an agent (e.g. a Subpostmaster) is liable to
account to his principal (e.g. Post Office) any sum declared in
his accounts.
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Responsibility for losses
24.A number of Applicants have accused Horizon of inaccurately
recording the transactions processed at their branch which, they
say, shows that they were not liable for the losses in their
branches. To date, Post Office has not been provided with any
evidence, either by an Applicant or in the Report, of Horizon’s
failure to record transactions accurately.
25.The Report looks to identify ‘thematic’ points where Second
Sight considers that Horizon may be flawed. However, these
points are either un-evidenced or have been proven not to be the
cause of losses in branches.
26.Absent any doubt over the integrity of the branch accounts
produced by Horizon, Post Office considers it fair to assume
that if a loss has occurred then it has been caused in the
branch and is something for which, in most circumstances, a
Subpostmaster is liable to make good. This reflects the core
tenet of the Subpostmaster Contract that Subpostmasters are
liable for any loss caused by their carelessness, negligence,
dishonest conduct or error.?
27. Post Office has investigated every allegation made about Horizon
through the Scheme. It is in its interest, as well as the
interest of the 8,000 serving Subpostmasters who have not
applied to the Scheme, to identify an issue if one exists.
However, there is no evidence of systemic problems with branch
accounting on Horizon. All existing evidence overwhelmingly
supports this position.
? Clause 12, Section 12
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28.
29.
30
31.
32.
Post Office's response to section 1 - Introduction
Section 1 of the Report provides details around Second Sight’s
initial investigation and the establishment of the Complaint
Review and Mediation Scheme. Although this summary is broadly
correct, it does not explain that Second Sight has performed two
distinct roles in two discrete phases.
In early 2012, a group of Members of Parliament led by the Rt
Hon James Arbuthnot MP raised a number of concerns with Post
Office over the reliability of Horizon, having been approached
by a small number of mainly former Subpostmasters under the
banner of the Justice for Subpostmasters Alliance (JFSA). These
Subpostmasters considered that apparently unexplained accounting
issues in their Post Office branches might be the product of a
flaw in the Horizon operating system.
.Given the serious nature of the issues raised, Post Office
agreed to appoint an independent firm of forensic accountants
(Second Sight) to investigate these claims as a matter of
urgency. The basis of Second Sight’s initial engagement was
reflected in a document for Subpostmasters entitled ‘Raising
Concerns with Horizon’, and included the requirement to:
“Consider and advise on whether there were any systemic
issues and/or concerns with the Horizon system including
training and support processes, giving evidence and reasons
for the conclusions reached.”
This scope of work expressly did not extend to investigating or
commenting on any individual concerns raised.
After a year’s investigation, Second Sight issued an ‘Interim
Report’ dated 8 July 2013 which stated that they had found:
“no evidence of system-wide (systemic) problems with the
Horizon software”.
However, Second Sight considered that a limited number of other
issues may have contributed to difficulties being experienced by
those Subpostmasters who had raised concerns, most notably
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33.
34
35.
36.
38
around the effectiveness of the support offered to them by Post
Office in their individual cases.
Since Second Sight had not found any evidence of systemic issues
with Horizon that could affect all Subpostmasters, Post Office
decided to establish the Scheme in order to provide an avenue
for Subpostmasters to raise their specific concerns regarding
“Horizon and associated issues" directly with Post Office on an
individual, case by case, basis.
.The purpose of Second Sight’s engagement by Post Office changed
fundamentally following the establishment of the Scheme. Whereas
Second Sight had previously been concerned with reporting to
Post Office about the workings of Horizon as a system (and not
individual concerns), its remit was now to focus on the
individual complaints in the Scheme. In doing so, they were to
investigate, as forensic accountants, the specific issues raised
by each Applicant as they related to Horizon or associated
issues, and report on these to Post Office and the Applicant.
The ‘undertakings’ (though this expression has a particular
meaning) referred to in paragraph 1.3 of the Report, appear to
relate to Second Sight's initial investigation, which was a
general review of Horizon which concluded when Second Sight
issued its report in July 2013. Accordingly, they are not
therefore applicable to the Scheme, being a review of specific
issues about Horizon raised by, and particular to, individual
Applicants.
. Those ‘undertakings’ also do not reflect the ‘Raising Concerns
with Horizon’ document or the Scheme documentation, both of
which have been publicly disclosed, and both of which clearly
define the two different stages and different purposes of Second
Sight's work. Both documents however, expressly state that
Second Sight's work was to be confined to the Horizon system and
the training and support processes connected with it.
.XXXXXThere have always been limits on Second Sight's scope of
work and access to and use of materials, despite what it might
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say, and those limits were agreed with Second Sight, MPs and the
JFSA. Unfortunately, Second Sight's desire to unilaterally grant
itself further investigative powers has distracted from its
investigations of Horizon leaving a number of enquiries without
a conclusion and has resulted in it offering opinions on topics
where it is ill-qualified to comment.
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Post Office's response to section 2 - Limitation of Scope in Work
Performed
39.Before and during the Scheme, Post Office has provided Second
Sight with a considerable amount of information including:
a. Spot Reviews;
b. Post Office's comprehensive investigation findings into
specific cases;
c. line-by-line comments on Second Sight's own case reports;
d. technical papers on particular issues raised by Second
Sight;
e. detailed feedback on Second Sight's first thematic report;
and
f. answers to more than 100 questions posed by Second Sight on
thematic issues.
40.Section 2 of the Report, however, suggests that Post Office has
not made available all of the information it has previously
committed to providing. This suggestion is incorrect, and
relates to the three broad areas covered in the following
paragraphs.
Access to the complete legal files
41. Second Sight says that it needs access to Post Office legal
files because Applicants have raised concerns about Post
Office’s "investigative and prosecution processes". These
matters do not fall within the terms of Second Sight’s
engagement.
42,Nevertheless, Post Office has provided non-legally privileged
material from its relevant ‘legal’ files. This was done in
accordance with the directions of the Working Group (which
oversaw the administration of the Scheme) where it was agreed
that Post Office would provide the bundle of documents which
would have been made available to the defence lawyers and the
Courts. This would include documents such as witness statements
and exhibits - in short, anything which Post Office relied on to
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43
support the charge, or which could undermine the prosecution or
support the defendant’s case. In addition, Post Office agreed to
provide, where held, other Court documents such as a memorandum
of conviction.
. At paragraph 2.5 the Report questions whether there have been
any miscarriages of justice. The Post Office naturally takes any
suggestion of this nature extremely seriously.. In none of Post
Office’s own investigations, nor through all Second Sight’s
extensive workhas any evidence emerged to suggest that a
conviction is unsafe.
Access to the emails of Post Office employees working at Bracknell
44.
45.
46.
In 2013, Second Sight asked for the email accounts of a number
of Post Office employees dating from 2008. This was in response
to an issue raised by Second Sight as part of its initial
investigation, prior to the publication of its report in July
2013. The allegation related to whether the Horizon test
environment in the basement of Fujitsu’s office in Bracknell
could have been used to edit live branch data. Post Office
explained at the time that it may be difficult to provide such
information in view of its age but did, in May 2013, provide the
email data it was then able to retrieve.
In order to address the allegation more comprehensively, Post
Office also provided Second Sight with a witness statement from
a key member of staff who worked at a Fujitsu site at Bracknell.
This confirmed that the basement was a secure test environment,
there was no connection to any live transaction data; live
transaction data could not be accessed from the basement; and
the basement was never used to access, change or manipulate live
transaction data in branches. In addition, Post Office provided
Second Sight with a considerable amount of policy documentation
relating to the Bracknell office covering systems access,
building access and security.
The Report links this issue to the possibility of some form of
unauthorised remote access to transaction data because of
complaints made by a number of applicants alleging unexplained
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46.
47.
48.
49,
changes to transaction data. Post Office notes that no evidence
of unexplained alterations of transaction data has been provided
and remains unclear about the information Second Sight is
seeking from the provision of email data. However, following
further discussions with Second Sight, Post Office has now
provided a further set of email data for August 2008.
Transaction data relating to third party client accounts
In June 2014, Second Sight asked Post Office to explain the
operation of its Suspense Account. Post Office replied to that
request in a written paper in July 2014. Second Sight then made
a request for further data on the accounting entries being
posted to the Suspense Account. Given that the purpose of this
request was unclear, Second Sight agreed to provide further
clarity on the nature of the enquiry, which they did in October
2014. Following some residual uncertainty over the focus and
purpose of the request, Post Office sent a further written paper
to Second Sight explaining the operation of its Suspense
Account.
Whilst the Post Office acknowledges it originally took longer to
respond to Second Sight’s initial requests than it would have
wished, it was able to answer Second Sight’s questions when a
shared understanding of the nature of the enquiry had been
reached.
48. Post Office’s Chief Financial Officer has now had two
meetings with Second Sight to discuss these matters and has
provided Second Sight with further ‘contextual data’. At the
most recent meeting, Second Sight agreed that it needed no
further information on the Suspense Account, and Post Office
has provided examples to reassure Second Sight that unmatched
differences were not left for long periods in the underlying
client accounts, thereby masking issues.
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50.49. It is also not the case, as stated in the Report,
that, for most of the past five years, substantial credits have
been made to Post Office’s Profit and Loss Account as a result
of unreconciled balances held by Post Office in its Suspense
Account. Post Office compares its data with that of third
parties in the normal way and the credits are not at all
substantial in that context. Post Office considers that it has
now provided Second Sight with adequate data and information to
close down this line of their enquires and Second Sight has not
suggested otherwise
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Post Office's response to section 3 - Risk Transfer
52.Section 3 of the Report broadly pulls together a number of
strands elsewhere in the Report into an allegation that Post
Office had improperly transferred ‘risk’ to Subpostmasters over
time. Once the constituent elements of this claim are properly
analysed, it becomes clear that either they are unsupported by
evidence, or the underlying analysis is incorrect.
53.Second Sight premises this view on three limbs:
a. The Subpostmaster Contract;
b. Changes in processes that make operating a branch more
difficult for Subpostmasters; and
c. The error-repellency of Horizon.
The Subpostmaster Contract
54.Detailed comments on the Subpostmaster Contract are set out in
section 7 of this reply. However, at paragraph 3.6 it is
suggested that the Contract does not commit Post Office to
support Subpostmasters in finding the source of losses in their
branches.
55.First, under the terms of the Contract, Subpostmasters are only
responsible for losses caused through their “own negligence,
carelessness or error" or for losses caused by their assistants.
Subpostmasters are therefore only liable for losses arising from
those operations that are under their control and
responsibility. As described in the overview above,
Subpostmasters play a critical role in identifying the cause of
losses and often Post Office, which is not in attendance in any
branch, cannot know what has happened.
56.Second, and contrary to the suggestion in paragraph 3.7, support
is available to Subpostmasters from the Post Office Helpline in
relation to dealing with discrepancies. Further support is also
available from the Post Office's Finance Service Centre (FSC),
the Branch Support Team and the Field Based Training Team.
57. FSC could become aware of issues owing to:
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. a branch calling FSC directly or being referred to FSC via
the Helpline;
e FSC identifying an anomaly in a branch from its accounting
records; or
. a customer raising an enquiry to the Post Office about a
transaction in a branch.
58.FSC works with a branch to try to identify the cause of any
erroneous transaction. This may include speaking to the branch
about how they have conducted the transaction, asking the branch
to provide missing details, checking the paper records held at
the branch against the transaction data on Horizon, liaising
with clients (whether customer banks, utility companies, etc.)
to gather different data streams on a transaction and contacting
customers to obtain their consent to remedy errors.
59.The Branch Support Team and the Field Based Training Team assist
branches when NBSC and/or FSC are unable to resolve the query or
issue by way of a telephone discussion and on-site (in branch)
support is required.
60. Post Office does provide considerable support to Subpostmasters.
Changes in operating practices
61.The second limb of Second Sight's argument is that Post Office
has changed its practice in ways that make it more difficult for
Subpostmasters to operate.
62.It should be noted that the Subpostmaster Contract provides that
Post Office may only require Subpostmasters to offer new
products and services where it is ‘reasonable’ to do so. The
contention that the Subpostmaster Contract provides Post Office
with a carte blanche to dictate to Subpostmasters is wrong.
63.In paragraph 3.10, the Report sets out five examples of changes
to business processes that Post Office allegedly implemented
without proper consultation and which transferred additional
risk to Subpostmasters. In none of these examples has Second
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Sight properly explained how they result in a transfer of risk
to Subpostmasters:
a. Phasing out of Third Party ATMs - Post Office presumes
Second Sight’s reference to ‘Third Part ATMs’ is to ATMs
that are not provided under contract through Post Office.
Prior to 2005/6, Post Office had contracts with a number of
banks and ATM providers that allowed them to install ATMs
in Post Office branches. In 2005/6 Post Office selected
Bank of Ireland (BoI) as its preferred ATM provider. The
other agreements were gradually phased out through:
i. a Bol ATM being installed to replace the existing ATM;
or
ii. where Post Office did not wish to install a BoI ATM,
the existing provider could either remove their ATM or
contract directly with the Subpostmaster.
Post Office does not understand how the change to having
Bol as its preferred supplier of ATMs increased the level
of risk to Subpostmasters.
b. Removal of paper paying in slips. As explained in more
detail in Section 14, this change was initiated by the UK
banking industry which, over the last 5-10 years, has
removed paper paying in slips in place of customers making
banking deposits using a chip and pin card. Post Office had
no choice but to implement this change. In any event, the
chip and pin system is more secure and less prone to error
and, if anything, has de-risked this process for
Subpostmasters.
a
Introduction of new products such as Lottery products and
Foreign Currency services. No explanation is provided in
the Report as to how these changes have transferred risk to
Subpostmasters.
d. Removal of Suspense Accounts. This function was not
removed but changed into the Settle Centrally and Dispute
function described at paragraph 9.5 of the Part One Report.
This allegation is therefore incorrect.
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e.
Change from weekly to monthly balancing. No explanation
has been provided as to how this change transferred risk to
Subpostmasters, particularly given that it is, and always
has been, open to Subpostmasters to balance their accounts
on a weekly basis (or at any other time). The move to
monthly balancing simply meant that the only compulsory
balance that needed to be undertaken was at the end of the
trading month.
64. These five examples therefore provide no support for the
Report's conclusion in this section about risk transfer.
The error repellency of Post Office’s business systems
65.The suggestion made at paragraph 3.11 that “there is little
incentive for Post Office to improve the error repellency of its
business systems” is incorrect. As recognised by Second Sight at
paragraph 3.12, human error has been found to be the primary
cause of cash and stock losses in the cases investigated. Such
errors are not only detrimental to Subpostmasters but also to
Post Office. For this reason, and the reasons described in more
detail in section 22, Post Office does regularly improve its
systems.
66.In paragraph 3.13, the Report sets out 7 examples of alleged
inadequacy in Horizon's error repellency:
a.
Hardware and technology failure rate. The Report does not
establish that hardware failures cause errors in branch
accounts. Nor has any analysis of the failure rates in
Horizon hardware been undertaken. There is therefore no
evidence to suggest that the failure rate is excessive.
. Telecommunications equipment. The telecommunications line
to a branch is, in large part, provided by the
Subpostmaster. This is not part of the Horizon system.
. Limited testing. Second Sight has undertaken no analysis of
the user experience testing undertaken by Post Office and
therefore has no evidence on which to form the view that
this testing was ‘limited’.
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d. Auto-calibration. Though the screen does not ‘auto-
calibrate’ there is a screen calibration application which
can be invoked at any time by the Subpostmaster from the
Engineering menu of Horizon. If the screen is out of
calibration then that would affect the whole screen and not
individual icons so it would be obvious to the user that
the screen had gone out of alignment. If this issue is
noticed and a call made to the Helpdesk then the
Subpostmaster or staff member would be asked by the agent
to re-calibrate their screen to fix the issue.
e. Software to prevent password sharing. If a User shares
their user ID and password with another member of staff,
this cannot be prevented by software as there would be
nothing to suggest to the system that anything untoward was
occurring. User ID and password sharing is a serious
contravention of procedure and would need to be dealt with
locally.
th
Software to detect suspicious out of hours transactions.
Subpostmaster can check for this as they have access to the
dates and times of the transactions conducted in their
branches.
High value transaction controls. The Report does not
Q
explain what these controls may be. It is noted that this
would typically mean some sort of escalation process to a
higher grade member of staff for authority. However, Post
Office has no control over the management structure offered
in branch; this is a Subpostmaster's responsibility and so
is the implementation of such controls.
Conclusion
67.As can be seen from the above paragraphs, none of the three
limbs of the Report's arguments in this Section can be
substantiated. Second Sight has not therefore demonstrated any
unfair transfer of risk to Subpostmasters. Where errors occur
in branch, a Subpostmaster is responsible for these as they are
within their control.
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Post Office's response to section 4 - structure and content of the
68.
69.
70.
7
report
Section 4 of the report focuses on explaining Second Sight's
approach to the Report, and correctly puts the 150 applications
into the context of a network of over 11,500 branches and almost
500,000 users of the Horizon system since its introduction.
Post Office notes that in paragraph 4.6 the Report comments on
the ‘impact’ on Subpostmasters, although Second Sight has not
made any assessment of that impact by reference to any
methodology, evidence and analysis. In those circumstances, it
is difficult to see how the Report reaches this view. Further,
this paragraph assumes that all Applicants have suffered
problems with Horizon - for the reasons set out generally in
this Reply, this is not correct.
Further, paragraph 4.9 implies Post Office did not, until
recently and where possible, preserve documents related to cases
in the Scheme which would otherwise be destroyed under Post
Office's data retention period.
. Although some cases are very old and fall outside the standard
retention periods for keeping information, Post Office has gone
to considerable lengths to search its records and provide as
much evidence as possible. Thousands of pages of information
have been identified, recovered and made available both to
Applicants and Second Sight.
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Post Office's response to section 5 - Process
72.Section 5 of the Report sets out Second Sight's process behind
preparing the Report. Although the concept of identifying
thematic issues is sound, in practice the evidence has not
supported the view that there are any thematic issues of
universal application to multiple Applicants.
Lack of thematic issues
73.A number of sections in the Report do not identify what Second
Sight term a ‘thematic’ issue which could be of general
application to multiple Applicants as opposed to matters that
fall to be addressed on a case by case basis. Where this arises,
Post Office will address those issues in its individual case-
specific Investigation Reports.
74.0f the 20 sections in the Report which focus on specific areas
(sections 7-26), 12 sections do not identify a ‘thematic’ issue
namely sections 9, 10, 11, 13, 15, 16, 17, 18, 19, 21, 23 and
24.
Absence of conclusions
75.The majority of the cases in the Scheme turn on there having
been a loss in a branch for which an Applicant was held liable.
For a ‘thematic’ issue to be of utility, it must help explain
why a loss may have arisen or been attributed to an Applicant.
The Report is largely silent on this critical issue, of the 5
sections that identify a thematic issue, 4 do not reach a
conclusion, namely sections 8, 12, 14 and 25. A firm conclusion
would have assisted Applicants and Post Office.
Outside scope
76.The scope of the Scheme is to consider matters “concerning
Horizon and any associated issues”. Matters such as the
Subpostmaster contract and other legal matters are not within
the scope of the Scheme and fall outside Second Sight's
professional expertise.
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No substantiation
77,
78.
In a number of places, the Report suffers from a lack of
supporting evidence, source documents, examples or statistics to
substantiate the conclusions it draws. It does not describe the
overarching methodology used to examine the weight of evidence
from different sources - this is most important where the
information provided by Applicants is purely anecdotal and has
yet to be investigated and tested.
Second Sight has received information from the approximately 150
Applicants to the Scheme, whereas in total there have been
almost 500,000 users of Horizon since its inception in 2001. The
Report is therefore based on the tested views of only 0.03% of
all Horizon users and cannot therefore be said to reflect
general user experience.
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79,
80
Post Office's response to section 6 - Scope
As described in section 1 of this reply, the purpose of Second
Sight’s engagement by the Post Office changed fundamentally
following the establishment of the Scheme.
.The scope of the Scheme is to consider matters “concerning
Horizon and any associated issues”. Matters such as the
Subpostmaster contract and other legal matters are not within
the scope of the Scheme and are outside Second Sight's
professional expertise.
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Post Office's response to section 7 - The Contract between Post Office
and Subpostmasters
81.Section 7 of the Report concerns the contract between Post
Office and Subpostmasters dated September 1994 (as revised over
the years) (the Contract). It considers (1) the potential impact
of some of the terms and conditions and (2) issues relating to
notification of the Contract terms to Subpostmasters.
82.An assessment of the Contract is outside the scope of the Scheme
which was to consider "Horizon and associated issues". Second
Sight has no mandate to consider the Contract and the Report
contains a number of statements that are incorrect. Neither
Second Sight Directors, nor, to the best of Post Office’s
knowledge, any of the people engaged by Second Sight to
undertake work in relation to the Scheme, have either
qualifications or expertise to comment on issues such as the
Contract which can only be undertaken against legal principles.
For this reason, no weight should be placed on this section of
the Report as it reflects only Second Sight's lay opinion.
83.To help avoid potential confusion, Post Office sets out the
correct position in respect of the Contract below.
Fairness of the Contract
84. Paragraph 7.7 concludes that "from a business perspective" the
contractual provisions referred to above (in particular Section
12 requiring the Subpostmaster to make good losses) operate to
the detriment of, and are unfair to, a Subpostmaster.
85.The Contract is a business to business arrangement. Save in a
few very narrowly defined areas (which are not applicable here),
there is no general principle at law of whether the Contract is
‘fair’ or not. In Post Office's experience, the terms of the
Contract are broadly similar to those used in franchising
arrangements across the UK.
86.In any event, Subpostmasters are agents and Post Office is their
principal. At law, agents owe duties to their principals
including the duty to act in good faith, to render accurate
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accounts and to make good any losses they cause. Section 12 of
the Contract simply reflects these legal principles.
87.The Contract reflects the basis on which Post Office and
thousands of Subpostmasters have successfully conducted business
for decades ,and it is neither commercially nor legally unfair.
The Report alludes to ‘duties’ on Post Office that do not exist
in the Contract. It is not now open to seek to retrospectively
change the contractual foundation of the relationship between
Post Office and Subpostmaster.
Subpostmasters’ understanding of the Contract
88.The Report suggests that Subpostmasters may not have reviewed or
fully understood the terms before entering the Contract. As a
result, the Report states, at paragraph 7.11 that Subpostmasters
are unable to mitigate ‘risks’ that they may face. Post Office
disagrees with this conclusion. In addition, this conclusion is
not supported by any evidence.
89.The Contract that is entered into between Post Office and
Subpostmasters is done so freely and at arm's length.
Ultimately, it is for the Subpostmasters to choose whether they
enter into the Contract or not.
90.The Report provides no evidence that Subpostmasters do not
understand the Contract. If the view being taken in the Report
is from a business perspective (whether Post Office or a
Subpostmaster) the provisions are very clear and written in
plain English.
91.In any event, it is a well-established legal principle that a
person who agrees to a contract is bound by its terms even if he
does not have a copy of those terms, has not read them or does
not understand them. Post Office cannot be responsible for a
Subpostmaster who may not have taken the time to read the
Contract.
92.The Report also notes that Post Office does not recommend that
Subpostmasters take legal advice. There is no obligation on Post
Office to make this recommendation. It is however open to any
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Subpostmaster to take legal advice on the Contract at any time.
The reference to the BFA standards at paragraph 7.10 is not
applicable here. The BFA recommendation is directed to
franchisees (in a similar position to Subpostmasters). The BFA
does not recommend that franchisors (in a similar position to
Post Office) insist that legal advice be taken by franchisees.
If anything, the BFA's advice supports Post Office view that
responsibility lies with the Subpostmaster to understand their
contract terms and Subpostmasters are free to seek and obtain
advice if they so wish.
Notification to Subpostmasters of the Contract terms
93. Paragraphs 7.11 to 7.16 state that Post Office does not provide
a copy of the Contract to Subpostmasters. This appears to be
based on the fact that a Subpostmaster does not recall receiving
the Contract or cannot now produce a copy. This does not mean
that the Contract was not provided. Given the age of some of the
cases in the Scheme, it is not surprising that recollections are
hazy and that some records are now not available.
94.It is open to Subpostmasters to request a copy of the Contract
throughout negotiations when seeking appointment and from Post
Office's Human Resource Service Centre if they have misplaced or
lost a copy. It is also Post Office's standard operating
procedure to ensure that the Subpostmasters have a full copy of
the Contract no later than the day that they commence their
position.
95. Paragraph 7.14 highlights that it is common practice for new
Subpostmasters to sign an ‘Acknowledgement of Appointment’
without a copy of the Contract. It is common practice that a
separate document will be signed rather than the full Contract.
As a point of law, terms and conditions can be incorporated into
a contract by reference to another document that is not signed.
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Post Office's response to section 8 - Automated Teller Machines (ATMs)
96.Section 8 of the Report raises various issues concerning the
accounting in branch for ATM transactions.
97.The Report does not clarify which precise part of the ATM
accounting process is under consideration by Second Sight. In
broad terms, the accounting process breaks down into three
elements:
a. Loading - cash for the ATM is sent to the branch by Post
Office and is loaded by the Subpostmaster into the ATM. This
requires the recording of the ATM cash as part of the
branch's stock.
b. Cash dispensed - the amount of cash dispensed by an ATM is
recorded daily on Horizon — see further below.
c. Exceptions - rejected cash and retracted cash - see further
below.
98.From the content of the Report, Post Office believes that Second
Sight has focused primarily on the processes for the recording
of cash dispensed from the ATM, however other issues are also
touched on. Despite Post Office highlighting this imprecision
in its last version of this Reply, Second Sight has not
identified the process at issue. This section of the Report
therefore still lacks a coherent evidence base for its claims.
99.In short, nothing in this section of the Report gives rise to
any issue that could cause a loss of cash in a branch. The
Report does highlight a few areas where Applicants have claimed
to struggle with accounting for ATM transactions, but the design
of the accounting process and the safeguards put in place by
Post Office mean that even a failure to account for ATM
transactions will, save in a few minor areas (highlighted
below), not cause a loss to a branch.
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Out of sync / air gap
100. The Report focuses on the situation where cash is dispensed
from an ATM. The process for accounting for dispensed cash is
set out at paragraph 5.27 of the Part One Briefing. In short, on
a daily basis (or on a Monday following a weekend) the
Subpostmaster prints a receipt from the ATM showing the amount
of cash dispensed. This cash dispensed figure is then entered
into Horizon by the Subpostmaster.
101. Simultaneously, the amount of cash dispensed is also
automatically transmitted to BOI by the ATM. This means that
there are two parallel records kept of the cash being dispensed
by the ATM: one by the Subpostmaster on Horizon and one by BOT.
102. The Report notes that there are situations when these two
systems can become ‘out of sync’ with one another, with one
record showing more or less dispensed cash than the other
record. This could be caused by the Subpostmaster entering the
wrong figure on Horizon.
103. What is not highlighted by the Report is that even if the
amount of money dispensed by an ATM as recorded on Horizon by
the Subpostmaster is different from the amount actually
dispensed as recorded by BOI, therefore resulting in the records
being ‘out of sync’, this doesnot result in there being a loss
to the branch. This is a pure accounting error by the branch.
104. There is a subsequent reconciliation of the Horizon figure
against the BOI accounts. This means that any error on the
Horizon account as to the amount of cash dispensed by the ATM
would be picked up within a matter of days and corrected by way
of a Transaction Correction to the branch.
105. As a result of this process, there is no difference in the
amount of cash held on site. Indeed, these accounting processes
do not require anything to be done with the physical cash at
all.
106. Simply because the accounts may be ‘out of sync’ for a
short period does not mean that there is a loss suffered by the
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107.
108.
branch. In summary, the air gap / out of sync issue cannot be a
cause of loss in branch.
vulnerable to "fraud and error" but does not explain how either
a fraudster could interfere with the process or how the process
could generate errors. Post Office notes that no case in the
Scheme has presented any evidence to support Second Sight's
view. In any event, there are further safeguards in place to
detect either of the above:
a. First, on receipt of a Transaction Correction, a
Subpostmaster should check whether the cash-dispensed
figure input by them on Horizon matches the cash-dispensed
figure on the ATM receipt that they will have retained in
branch. This will eliminate any human error or fraud
through the incorrect entry of figures into Horizon by
branch staff.
b. Secondly, there are two areas of assurance as regards the
At paragraph 8.8, the Report suggests that these process is
dispensed figures reported to Post Office which Post Office
compares to those input by the branches. The dispensed
figures are notified by LINK, not Bank of Ireland. They are
part of the daily consolidation and reporting of dispensing
between banks. They facilitate interbank settlements for
the whole of the UK ATM network. LINK operates its
reporting processes on a basis of scrutiny from all the
banks. In addition, each bank would be checking the
dispensed values for interbank settlement against the
individual customer account updates for its own
customers. Post Office is not party to these reconciliation
processes in the banks, but takes assurance that they would
be conducted with rigour across the banks.
The above steps also address the Report's criticism that
Post Office does not investigate ATM-related discrepancies as
clearly it does. Second Sight's misunderstanding in this regard
may have arisen because no case in the Scheme gave rise to a
need to verify the cash-dispensed figure as each case raising
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this issue was shown to have been caused by human error in
branch (the cash dispensed figure not being correctly inputted
into Horizon).
109. In paragraph 8.11, the Report says that Second Sight has
seen ‘examples’ where the printed ATM-generated figures are
false. There were two cases in the Scheme where an ATM produced
an in branch report with an erroneous figure. This was not
however the cash dispensed figure mentioned above and was
attributable to the Subpostmaster making repeated mistakes in
operating the ATM. Ultimately, however, this erroneous figure
was immaterial and did not affect the branch's accounts.
Asserted complexity of accounting for dispensed cash
110. At paragraph 8.6 the Report states that the Post Office
system for operating ATMs is "a complex arrangement, requiring
greater human intervention.. than that typically needed in most
high street banks". The Report does not specify which part of
the branch accounting process is considered more complex,
however given the focus on the ‘out of sync’ issues it seems
that the Report is levying this allegation at the accounting
process for dispensed cash (see above).
lll. The Report’s conclusion is not supported by any evidence
and does not outline the differences in processes between Post
Office and a bank save to say that banks’ ATMs are fully
computerised.
112. At various points, the Report suggests that Applicants also
found it difficult to account for cash being dispensed from
ATMs. Little evidence is presented to support this view.
113. As described above, the ATM automatically records the
amount of cash dispensed. The only part of the process that is
manual is the need for the Subpostmaster to take the cash
dispensed figure from the ATM and enter it into Horizon. Second
Sight has adopted the phrase ‘Air Gap’ for this manual
interaction. As far as Post Office is aware, it is not a phrase
used by any Applicant.
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114. Within this accounting process, no calculation or counting
is required - it is literally typing a single figure into
Horizon on a daily basis. Given the absence in the Report of any
explanation or justification for the view that this is
‘complex’, Post Office does not accept that this process is
‘complex’.
115. The Report appears to rely on a number of extracts from
Post Office's Operations Manual to show that the above
accounting method was too confusing for some Applicants.
Paragraph 8.20 states that the ‘out of sync’ problem described
above, was commonplace prior to February 2008. However, the
Report sets out the opinion, at paragraph 8.22, that the new
instructions in the Operations Manual released after February
2008 represent an example of the complex instructions and a
cause of confusion. Paragraphs 8.20 and 8.22 are therefore a
contradiction of one another - the first saying the problem pre-
dated 2008, the other saying the problem resulted from the 2008
update.
116. The Report does not describe any instructions provided
prior to the February 2008 Operations Manual or any subsequent
updates. No assessment is made as to any change in the reporting
of problems in relation to ATMs (and specifically in relation to
misunderstanding of the instructions) before or after the
February 2008 Manual update and in particular whether or not
there was an increase or reduction in the potential for errors.
This assessment and consideration has not been made in the
Report. This omission, together with the fact that no evidence
is provided to confirm how many Applicants did attribute errors
to these (or any other) instructions, whether before or after
February 2008, means there is no evidence to support the
Report's view that the ATM accounting procedure was too complex.
AIM Support
117. The Report notes that Applicants have alleged that the
Helpline repeatedly told them that in respect of the ‘out of
sync’ error the "problem would sort itself out". It also states
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at paragraph 8.26 that the advice from the Helpline was
inadequate and misleading. There is no evidence provided to
support either allegation. The advice provided needs to be
assessed on a case by case basis as there is no evidence that
there is a wider issue with the advice provided. It has not been
shown to be a ‘thematic’ issue.
118. Even if the advice provided was that an error would "sort
itself out", in light of the reconciliation between Horizon and
BOI (as described above) any ‘out of sync’ problem would be
corrected by a Transaction Correction. This would prevent the
build-up of any accounting shortfalls. As explained above, there
is no loss caused to a branch by an ‘out of sync’ issue as the
overall cash in branch relating to the ATM remains the same.
iis. Overall, the assertion that the support provided was
inadequate has not been supported by any evidence or logical
reasoning.
120. In terms of the suggestion made at paragraph 8.27 that
Subpostmasters were “left to work out for themselves” how to
carry out the ATM related accounting on their branch Horizon
system, this is incorrect.
121. On installation of an ATM, training on operating the ATM is
provided by Wincor. When a Post Office branch which already has
an ATM transfers to a new Subpostmaster, ATM training is
provided by Post Office as part of its standard training
package. Each branch is also provided with a Bank of Ireland ATM
Operator Manual on how to use the ATM which includes
descriptions of how to load cash into an ATM, how to obtain the
ATM totals receipts and how to use the ATM's cash management
menu.
122. Also, each branch is provided with "Accounting Instructions
for Bank of Ireland ATMs" which explains how activity on an ATM
should subsequently be recorded by the Subpostmaster on Horizon.
123. If this is not sufficient or issues emerge, additional
support can be accessed via NBSC. If NBSC is unable to resolve
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the branch query/issue then further telephone support is
provided by the Branch Support Team who will also assess whether
additional on-site support and or training is required. If so,
the Branch Support Team will arrange such support or training
for the branch.
Weekend trading
124. Paragraph 8.25, which considers trading over weekends,
appears to have no relevance to the explanation of losses
alleged to stem fromthe ATM. Post Office is not aware of any
specific issue with operating an ATM at weekends.
Power and telecommunication issues
125. Paragraph 8.29 of the Report states that many Applicants
have commented on the impact of power and telecommunications
failures on the ATM. The Report acknowledges that, even when
they have dates of power or telecommunications failures,
Applicants cannot clearly link them to specific deficiencies in
their branches.
126. There is a standard recovery process in place to ensure
that no data is lost or corrupted. This recovery process was
reviewed in detail by Second Sight in their Interim Report and
found to work. Post Office remains confident that branch
accounts will not be corrupted due to power or
telecommunications failures.
127. Despite this, the Report speculates that the need to re-
boot the ATM by either the Subpostmaster or BOI could “introduce
a possible risk of data loss or corruption". This comment is not
supported by any evidence either from a specific Applicant's
case or general evidence that such a problem may exist.
128. Post Office therefore remains confident that data cannot be
corrupted as suggested in the Report.
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Retracts
129. Paragraphs 8.32 to 8.36 discuss failed cash withdrawals.
As paragraphs 8.33 and 8.34 state, if cash dispensed is not
physically removed then after a period of time the cash will be
retained by the ATM. This is known as a ‘retract’. It can occur
for a number of reasons but often because the customer gets
distracted. It is also possible that retracts can be subject to
fraud by customers. The Report indicates that Subpostmasters
might be liable for losses caused by this fraud. This is
correct where Subpostmasters have failed to account for retracts
correctly. Provided the accounting is done correctly, a
Subpostmaster will not be liable for any loss caused by retract
fraud.
130. The accounting process for retracts is as follows:
a. Each working day, a Subpostmaster must check the ATM Bank
Totals receipt (which is generated by the ATM) to see if
any retracted transactions have taken place. The receipt
will show the number of retracts.
b. If any retracts have taken place, the Subpostmaster must
physically remove the retracted notes from the ATM (which
are stored in a separate part of the ATM from other cash).
c. For all retracted cash removed from an ATM, the
131.
Subpostmaster must count and report
value of retracted cash on the same
Surplus Cash button on Horizon). If
the Post Office branch is closed it
reported on the next working day.
placed in the branch safe and forms
holdings of the branch.
Customers' accounts will be debited
on Horizon the total
day (using the ATM
a retract occurs when
should be removed and
. Once reported on Horizon, the retracted cash should be
part of the cash
even though they did
not remove their cash. This is often re-credited but it is an
issue for the customer and their bank, although Post Office will
do what it can to assist both to resolve this issue. At this
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point, the branch accounts will balance as the amount of cash
physically dispensed (including any cash subsequently retracted)
will match the cash dispensed figure on Horizon and the amount
of cash in the retract cassette will have been counted and added
to the branch accounts.
132. Retract fraud occurs where a customer conducts a withdrawal
transaction from their own bank account using an ATM. When the
cash is vended, the customer looks to remove the middle notes,
leaving the top and bottom notes behind, thereby hoping to trick
the ATM into believing that the cash has not been taken. The ATM
then retracts the remaining cash back into the machine,
believing that it has retracted the entire sum withdrawn. The
fraudulent customer's intention is that when the bank checks the
retract records for the ATM in question, it sees that there was
a retract recorded against the customer's withdrawal transaction
and would then fully re-credit the customer's account.
133. Provided the Subpostmaster follows the correct procedure in
relation to retracts, he will not be liable for any ATM cash
loss caused by retract fraud.
134. Post Office provides to BOI details of the amount of each
retracted cash transaction as part of its weekly ATM balances
recorded on Horizon. BOI uses that information to look for a
match between the actual amount of retracted cash removed from
the ATM and the amount of the original cash withdrawal
transaction. If there is a match, then this will indicate that
there has been no retract fraud and the full amount will
typically be re-credited to the customer. If there is a
discrepancy, then BOI may undertake further investigations into
the customer's activity.
135. As long as Post Office can provide the daily retract
declarations from Horizon then any loss caused by any retract
fraud does not fall on the Subpostmaster.
136. If a Subpostmaster does not declare an ATM balance through
Horizon which includes the amount of any retracted cash, then
Post Office cannot provide that information to BOI. As BOI has
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not been provided with balancing information it is unable to
determine whether a retract was fraudulent. The full amount of
the cash withdrawal re-credited to the customer is therefore
charged on by BOI to Post Office.
137. Where Post Office is charged by BOI, it passes on this
charge to the Subpostmaster by way of a Transaction Correction
where the weekly ATM balance, including any retracted cash
records, are not available because of the Subpostmaster's
failure to follow proper accounting processes.
138. It should be noted that where the retract was not
fraudulent, the correct amount of cash will have been retracted
into the ATM. Even if the Subpostmaster has not properly
accounted for this cash on Horizon, the retracted cash will
still be in the branch (either in the branch's cash holdings or
still in the ATM) as surplus cash. This surplus cash will offset
any Transaction Correction for failing to follow proper
accounting procedures.
139. Where retract fraud has occurred, then the amount of
surplus cash recovered from the ATM will be less than the amount
of the original cash withdrawal transaction. This discrepancy
will fall on the Subpostmaster if they have not followed the
proper accounting procedures.
140. The Report does not suggest there is any failure in the
above procedure that may cause an unwarranted loss to a
Subpostmaster. Post Office therefore remains confident that
provided the above process is followed by a branch, a
Subpostmaster will not be liable for loss caused by retract
fraud. However, should they not follow the above process, then
they may be liable for some or all of the cash lost to the
fraud. Post Office considers that this allocation of
responsibility for preventing retract fraud is fair and
Subpostmasters can avoid all risk altogether by following simple
accounting processes.
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Other frauds
141. Post Office accepts that there are other forms of fraud
that may be occurring. However, it is not aware of any form of
fraud (including retract fraud) that creates a loss to
Subpostmasters, provided they follow the correct accounting
procedures.
142. Other than speculation about unspecified issues that may
have affected other ATMs, the Report presents no evidence that a
branch has suffered a loss due to fraud where all the accounting
processes had been followed correctly. The absence of a single
example of third party fraud reinforces Post Office's view that
this is not an issue that causes loss to Subpostmasters.
Conclusion
143. Overall, provided a Subpostmaster follows the appropriate
procedures they will not be liable for any ATM loss due to an
‘out of sync’ problem or retract fraud. Post Office does not
agree that the instructions and support in relation to ATMs are
inadequate. No evidence is provided to support this position nor
do the large number of ATMs across the Post Office network that
are operated without concern appear to have been considered.
This would support the position that the operating practices for
ATMs are clear, understood and work in practice.
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Post Office's response to section 9 - Motor Vehicle Licences
144. Section 9 of the Report considers the issuing of Motor
Vehicle Licences (MVL). The Report itself notes that only a
small number of Applicants reported problems concerning
processing MVLs. It is not, therefore, clear that this can be
considered a system-wide issue of general application.
145. Paragraph 9.1 describes a problem encountered (by what Post
Office believes to be a single Applicant) when form V11C (the
form used by customers to renew their MVL tax discs) was
misprinted with the incorrect barcode. Form V11C is not produced
by Post Office but by the DVLA and therefore this was an
external error.
146. If there is an error with a barcode, the issue raised will
relate to the tax banding. This issue could benefit or
disadvantage a customer. However, Horizon would invite payment
at the level requested by the barcode. Provided that payment was
taken for the amount requested by Horizon the branch would not
suffer a loss as there is no loss or gain from the transaction
from the branch's and Post Office's perspective. Whilst this
issue is clearly not desirable (and Post Office would offer all
possible assistance to the customer to correct any error on the
DVLA issued V11C form), this issue does not impact on branch
accounting.
147. This appears to be a one off incident, created by a barcode
that was created by a third party, the DVLA. As this issue is so
specific to a particular Applicant's circumstances, Post Office
cannot see how this can be classed as a thematic issue affecting
Applicants generally.
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Post Office's response to section 10 - Foreign Currency Transactions
148. Section 10 of the Report discusses, and makes a number of
assertions about Post Office’s “system for transacting foreign
currency transactions”. The conclusions made at 10.2 that the
accounting processes for foreign exchange transactions were
“fundamentally flawed” and at 10.10 “deeply flawed and
dysfunctional” are rejected by Post Office.
149, The allegations are made in relation to the Forde Money
Changer (FMC) Machine which ceased operation in circa 2004. As
far as Post Office is aware, of the 21 Applicants that have
referred to issues encountered with Foreign Currency
transactions, only one relates to a time period when the
transactions would have taken place on the FMC machine. Clearly
therefore, this is not what could be termed a ‘thematic’ issue,
but rather, the issues discussed turned on the individual
circumstances of that case. It cannot therefore justify the
assertions referred to in the above paragraph. We note that at
paragraph 10.10 of their Report Second Sigh admit “..we have yet
to complete our investigative work on that case..”
150. Nonetheless, the actions taken by the Subpostmaster in
question, namely failing to adhere to standard operating
procedures and Money Laundering legislation, did not affect
branch accounts - they left Post Office at risk of loss of
revenue.
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Post Office's response to section 11 - National Lottery
151. Section 11 concerns National Lottery transactions which are
described in more detail at paragraph 5.35 of the Part One
Briefing. In particular, the Report highlights alleged problems
that Subpostmasters may have in relation to (1) scratchcards and
their activation and (2) sales continuing outside of Post Office
hours of Lottery products in a connected retail shop resulting
on the Horizon and Camelot terminals being ‘out of sync’.
Activation of Scratchcards
152. Paragraph 11.4 states, correctly, that before February 2012
any Lottery scratchcards received by a branch had to be manually
‘activated’ on Camelot terminal and then remmed in to Horizon.
This process is described in more detail at paragraph 5.42 of
the Part One Briefing.
153. Paragraph 11.3 of the Report describes how a branch could
become ‘out of sync’. This means that the activation of
scratchcards on the Camelot terminal did not reflect those
remmed in on Horizon. This would result in either a surplus or a
deficiency of scratchcard stock in the branch accounts. To
remedy this error, Post Office and Camelot conducted daily
reconciliations of the data on the Camelot terminal and on
Horizon. Where there was a discrepancy, a Transaction Correction
would be issued to the branch.
154. Any errors that occurred through the failure to activate or
rem in scratchcards were errors that occurred in branch due to a
failure by a Subpostmaster to follow the correct procedure.
155. However, the effect of not remitting in scratchcards into
Horizon will not in itself create a loss. The physical
scratchcard stock will still be in the branch as it must have
been delivered to the branch for it to be activated on the
Lottery terminal. The Transaction Correction only increases the
amount of scratchcards shown in the branch accounts to reflect
the amount actually on hand.
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156. If the scratchcards have been sold but not remmed into
Horizon, the branch would show a negative stock value for
scratchcards (as each sale reduces the stock line in the
accounts even if this goes below zero). The subsequent
Transaction Correction will therefore increase the scratchcard
holdings, cancelling out the negative figure and bringing the
accounts back into balance.
157. The opposite effect will happen if scratchcards have not
been activated on the Lottery terminal but remmed into Horizon.
158. In summary, it is clear that this issue is caused by errors
in branch for which Subpostmasters are responsible but that in
any event this issue cannot be a source of actual losses.
Support
159. At paragraph 11.8 the Report states that the problems
encountered by the Applicants (prior to procedural improvements
described at paragraph 5.43 of the Part One Briefing) were
exacerbated by the Helpline which was not able to offer
assistance. Post Office is not aware of the specific calls or
incidents that the Report is referring to which are alleged to
demonstrate a thematic failure to provide adequate advice.
160. This is an issue that will need to be considered on a case
by case basis depending on the advice provided to an individual
Applicant in a specific instance. However, as noted above, the
reconciliation process conducted by Post Office means that any
error would be corrected in due course.
Out of hours sales
161. Paragraph 11.2 of the Report describes an alleged problem
relating to the synchronising of sales that take place outside
the hours when the Horizon system is operating at the Post
Office counter. Sales of Lottery products (as described at
paragraph 5.39 of the Part One Briefing) may continue while a
connected retail shop is open but the Post Office counter is
closed. However, the branch needs to ensure that any cash taken
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for any ‘out of hours’ sales is transferred from the retail shop
to the branch cash holdings the following day.
162. The value of the ‘out of hours’ sales (and any other sales)
will be automatically sent to Horizon each day by way of a
Transaction Acknowledgement which will increase the cash
position in the branch's accounts. The amount of cash to be
transferred from the retail side to the Post Office side is
easily identified as the figure is displayed on the Transaction
Acknowledgement. If a Subpostmaster does not transfer the
physical cash from the retail side into the branch for these
sales, this will produce a cash shortage in the branch's
accounts. The Subpostmaster will be liable for this cash
shortage at the end of the trading period.
163. Paragraph 11.9 of the Report highlights an alleged
‘complication’ occurring on the final Wednesday evening of the
monthly trading period for those branches operating Lottery
terminals. This is a reference to the trading period
reconciliation completed on a monthly basis. Rather than process
the reconciliation on a Wednesday evening as they would normally
do, Subpostmasters with Lottery terminals have first to accept
the Transaction Acknowledgement sent overnight and complete the
reconciliation as a matter of priority the following morning.
The Report states that advice on this process was not always
provided by the Helpline.
164. Post Office has not seen any evidence to support this
assertion and has provided Second Sight with call logs relating
to individual Applicants' cases. However, no specific calls are
referenced to support this statement.
165. In fact, branches operating a Lottery Terminal needed to
make daily cash declarations (see paragraph 8.2 of the Part One
Briefing) like all other branches. As Lottery sales data is sent
overnight, Lottery branches are instructed to conduct their cash
declarations and end of trading period balances (see paragraph
7.45 of the Part One Briefing) first thing in the morning after
the Lottery data was received. This was not therefore a
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complication but an adjusted daily process for branches with
Lottery terminals.
166. In practice, some branches chose not to follow ‘next day’
guidance and may have conducted balances several days later.
However, Post Office operational instructions have always
provided for next day accounting.
167. In summary, any loss arising from ‘out of hours’ issues
highlighted in the Report will arise as a result of an error in
the branch (for which a Subpostmaster is liable).
Conclusion
168. Procedures have evolved to assist Subpostmasters and reduce
the number of Transaction Corrections that are necessary in
relation to scratchcards, especially in relation to their
activation. However, the ‘out of sync’ effect created by either
incorrect activation or non-activation of scratchcards, or not
correctly recording the out of hours' sales, are errors that
arise within a branch. It is recognised that this error by
branch staff can, in extreme cases, lead to a high number of
Transaction Corrections being issued to a branch which, in turn,
can cause confusion. However, this is easily resolved by
running a separate Lottery stock unit so that Lottery issues do
not affect general branch accounting. In any event, the errors
were not due to either Post Office or Horizon, and therefore any
liability appropriately remains with the Subpostmaster if it
arises.
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Post Office's response to section 12 - Training, Support and
Supervision
169. Section 12 principally considers the training on Horizon
and branch accounting provided to Subpostmasters by Post Office.
Currently, training for Subpostmasters consists of a mixture of
classroom training and in-branch training. Further training is
available upon request and there is a well-developed support
network including the NBSC, managerial support and Field Support
Advisors. This training and support is described in more detail
at section 4 of the Part One Briefing.
170. Paragraph 12.2 of the Report comments that the training was
adequate in relation to ‘Business as usual’ transaction
processing but was weak in relation to the end of day, end of
week and end of trading period balancing. In addition, the
Report states that there was no consideration given to dealing
with discrepancies, how to identify the root causes of problems
and how to deal with Transaction Corrections.
im. These views appear to be based entirely on the anecdotal
information provided by Applicants in their CORs. As noted in
the introduction to this Reply, these assertions remain largely
untested. Post Office has not been asked to provide any training
materials for review nor has the Report established any industry
standard or contractual benchmark against which to judge Post
Office's performance. The limited analysis used to support the
Report's conclusion is considered below and shown to be
incorrect.
172. Given that the Report has presented no evidence or analysis
that shows that Post Office's standard training is defective,
Post Office stands by its training practices as being
appropriate and effective. Post Office considers that the
training and support that is provided is fit for purpose and
adequate to meet the needs of Subpostmasters. This is proven by
the thousands of Subpostmasters who are successfully operating
Horizon daily, having received the training from Post Office.
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173. There may of course be specific cases where training and
support has not been provided to Post Office's usual standards
(which is not impossible given the thousands of Subpostmasters
trained and supported by Post Office over the years) but these
situations will be considered on a case by case basis and are
not reflective of any general thematic issue.
Move to Horizon
174. At paragraphs 12.3 and 12.4, the Report finds that many
Applicants found that discrepancies began to occur when they
moved to Horizon. The conclusion reached in the Report is that
this was due to a lack of understanding of how the system was
due to operate and be used, meaning they were insufficiently
trained, had not been able to train their staff properly or
there were issues with the new screen-based processes.
175. Post Office does not agree with this conclusion and it
appears to be unsupported by any evidence that fewer mistakes
were made prior to the introduction of Horizon. Transaction
records are not available for the pre-Horizon period and it is
not possible to test the conclusion which is put forward. It
therefore appears that the Report has accepted Applicants’
anecdotal recollections of events without testing these for any
corroborating evidence..
ATMs, Lottery transactions, MVL foreign currency or other specialist
products
176. At paragraph 12.6 the Report highlights that Applicants
considered that the Post Office trainers and line managers were
weak in relation to dealing with ATMs; Lottery transactions;
Motor Vehicle Licences; Foreign Currency and other products.
177. There is a lack of evidence to support these alleged
comments from Applicants. Due to document retention policies,
training records for a number of Applicants are no longer
available. There also appears to be no contemporaneous evidence
that Applicants were not provided with adequate support by
trainers or line managers whether in relation to ATMs, Lottery
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transactions, MVL, foreign currency or other specialist
products. If there was a lack of understanding in relation to
these aspects, Post Office would expect the Subpostmasters to
request further training or otherwise seek assistance through
NBSC.
Training Needs Analysis
178. Training support is provided through various means
including the NBSC and managerial support. In addition, training
materials are provided on a regular basis and further training
can be requested by Subpostmasters.
179. The report, at paragraphs 12.7 and 12.8 suggests that it is
ineffective to rely on Subpostmasters to identify on-going
training needs in their branches and that further training was
delivered in accordance with user demand rather than being
determined by a Training Needs Analysis. There are a number of
factors that can affect a branch's performance and the need for
training e.g. changes in an Applicant's assistants, changes in
the way a Subpostmaster may operate his/her business, seasonal
pressures, changes to the connected retail business etc. None of
these factors will be known to Post Office but they will all be
known to the Subpostmaster. Post Office therefore considers that
it is most effective for each Subpostmaster to be tasked with
seeking further training rather than it being proposed by Post
Office.
180. Nonetheless, when Subpostmasters complete their training
there are follow up reviews at one, three and six monthly
intervals. In addition to confirming that the business is
operating as it should be, there is an analysis of the
Subpostmasters' understanding. If there are any gaps, these are
highlighted and further training can be provided. After this
stage, there is a reasonable assumption that the Subpostmaster
will be reasonably competent, with the support network
highlighted above, to operate Horizon. Subpostmasters are
operating a commercial business and can request additional
assistance and training when required.
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Training assistants
181. As is made clear within the Contract (at section 15,
paragraph 7) it is a Subpostmaster's responsibility to train
his/her staff. Nevertheless, the Report criticises Post Office
at paragraph 12.7 for not operating a ‘quality control function’
to ensure that branch staff are properly trained by
Subpostmasters.
182. The Report seeks to impose on Post Office a responsibility
which it does not have under the Contract or generally.
183. Any failure by a Subpostmaster to train their staff
adequately could be the reason for the losses or increase in
discrepancies. However, any resulting losses would be due to the
Subpostmaster's error and he would be liable for them (under
section 12, clause 12 of the Contract).
184. In any event, Post Office could not operate the quality
control function proposed by the Report. Each Subpostmaster, as
an independent business person, is free to employ whoever they
wish (subject to registering them with Post Office) as
assistants and to give their employees whatever tasks they wish.
185. Furthermore, Post Office cannot monitor the performance of
individual assistants it does not engage or employ; only
Subpostmasters can do this.
186. Post Office agrees that a ‘quality control function’ should
be applied to assistants. However, this should be undertaken by
Subpostmasters and not Post Office. Indeed, in a number of
cases, losses appear to have stemmed from Applicants’ failures
to exercise any ‘quality controls’ over the actions of their
staff.
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Post Office's response to section 13 - The Helpline
187. Section 13 concerns the assistance provided by the Helpline
to the Applicants. Post Office operates a number of helplines
including the Horizon Help Desk and Finance Services Centre. It
is presumed that the Report is referring to the NBSC. More
detail on the Helpline can be found at paragraph 4.2 of the Part
One Briefing.
1g. The following criticisms of the Helpline are made in the
Report:
a. Difficulty contacting the Helpline due to limited
availability;
b. Unhelpful, script based responses;
c. Many calls were afforded “low priority", including those
relating to balancing problems and discrepancies; and
d. Contradictory advice that revokes previous advice.
189. This section of the Report repeats the assertions made by
Applicants. Those allegations appear untested and the Report
reaches no conclusion save to say that “many of the shortfalls
were, on the balance of probabilities, attributable to errors
made at the counter” and whilst it may not be what Applicants
expected, “.. Post Office’s Chesterfield-based Helpline staff
cannot be expected to determine from afar how every discrepancy
has arisen in every branch..”. On this basis, Post Office cannot
understand how this topic is considered a thematic issue.
Nevertheless, the allegations presented in the Report are
addressed below.
Difficulty contacting the Helpline due to limited availability
190. Post Office has previously acknowledged that as changes
were made to standard operating practices over the years there
have been periods where the Helpline could be difficult to
contact. Changes were made, especially at the end of trading
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periods, and the hours for which the Helpline was available were
extended.
11. Currently the opening times for the Helpline are from 06:00
to 23:00 on Monday to Saturday and 07:00 to 17:00 on Sunday and
Bank Holidays. Post Office monitors the number of calls made to
the Helpline.
192. Statistics available for the period from April 2014 to
February 2015 show that:
Calls made: 546,127
Calls Answered: 485,841 (89%)
Average waiting time until answer: 87 seconds
Calls abandoned: 11%
193. As can be seen from the above calls the average waiting
time was just 87 seconds and 89% of all calls made to the
Helpline were answered. Of the abandoned calls, this will
include all abandoned calls and therefore will not solely be
callers who have decided to abandon their call because they
cannot get through to the Helpline (for example they may have
resolved the issue themselves).
Unhelpful, script based responses
194. The Helpline does not use scripts. The operators, many of
whom are very experienced with Horizon, listen to the query and
then, using ‘categorisations’ in Remedy (the contact management
system) the Post Office Knowledge Base is accessed, where there
are articles relating to that category of call. The operator
then selects the relevant article according to the issue raised
by the caller and relays the information to them. If the
Knowledge Base does not provide the relevant information there
is a second tier of advisors to which the enquiry can be
escalated.
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Many calls were afforded "Low Priority"
195. There is no priority system in place for calls to the
Helpline with the exception of matters relating to robbery or
burglary. Whilst those calls are dealt with as a priority, other
calls are answered and dealt with in the order they are
received.
196. In addition, if the Subpostmaster is not satisfied by the
advice provided they can seek a higher level of support as
described at paragraph 4.6 of the Part One Briefing.
Alleged contradictory advice
197. No evidence is presented in the Report to support the view
that contradictory advice has been given by the Helpline.
General
198. All calls to the Helpline are recorded by the Helpline
operators in the NBSC call logs. The logs describe briefly the
nature of the question and the answer given, if appropriate.
The Report states that there is insufficient evidence within the
call logs that have been provided to them to conclude what
advice was provided. However, Post Office considers that if
calls were not being answered or addressed appropriately then
either the matters would be escalated (which would be noted) or
there would be repeated calls about the issue that the
Subpostmaster was facing. There would be evidence that the
advice had not resolved the problem or the Applicant was not
happy with the advice. The absence of such evidence suggests
that the calls had generally been resolved satisfactorily whilst
accepting that there may have been individual calls where an
Applicant was not content with the advice provided.
199. At paragraph 13.2, the Report states that a frequent
comment by the Helpline was that matters would resolve
themselves. It is likely that this was reference by the
Helpline to a Transaction Correction potentially being generated
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following a surplus or deficiency and that would resolve the
issue.
200. Through its own investigations, Post Office has found no
evidence to support the allegations that the Helpline would
often merely comment that matters would resolve themselves or be
dismissive of any enquiry. In addition to the initial advice
from the Helpline, if matters could not be resolved they could
be escalated to a higher level of support. Support could have
been provided by Field Support Advisors or other managerial
support if it had been requested. Post Office is not aware of
any wider systemic problems where this support was not being
provided.
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Post Office's response to section 14 - Limitations in the
Transactional "Audit Trail"
200. Section 14 of the Report considers what it generically
refers to as ‘limitations in audit trails’. The Report is
concerned that Subpostmasters are not able to investigate the
root cause of errors (even where they admit it is caused by
their own, or an in-branch, error) due to a lack of access to
necessary transaction data.
201. The Report considers three situations:
a. Data that is not available on the day of the transaction
under investigation;
b. Data that is available but after 42 / 60 days is no longer
available; and
c. Data that is not available after suspension.
202. In general, Post Office considers this section is premised
on a misunderstanding of the nature of the information needed by
branches to investigate losses.
203. If, at the end of a day, a branch produces a cash
declaration that shows a discrepancy, then the branch will have
access to a range of reports on different products and
transactions to investigate the possible causes for the
discrepancy (including a complete line by line listing of all
transactions that day). This also applies at the end of the
trading period as a trading period is either 4 or 5 weeks (28 or
35 days) and the above reports and data have always been
available in branch for a minimum of 42 days.
204. If a Transaction Correction is sent to the branch, the
information needed to verify the Correction will not be the
Horizon data (Post Office has this data and takes this into
account when generating the Transaction Correction). The
information is likely to be in the paper records held at the
branch.
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Data that is not available even from the day of transaction
205. Paragraphs 14.4 to 14.8 of the Report raise the issue that
some information is not available to Subpostmasters even on the
day that a transaction takes place. The example provided in the
Report is where an aggregate amount or volume is provided for
Debit or Credit Card transactions. An aggregate amount for the
number of transactions was provided at the end of each day
rather than a breakdown of the individual transactions. As a
result, the Report states that Subpostmasters are not able to
identify the individual transaction that may have caused a
balancing error. The Report considers that this would prevent a
Subpostmaster from mitigating their loss or remedying the error
by contacting the customer. This position was allegedly
different prior to the introduction of Horizon when paper
records were kept and could be reviewed.
206. Post Office does not understand this line of enquiry.
Debit and credit card information has never been retained on
Horizon in branch - indeed doing so would be a breach of Payment
Card Industry standards (and Horizon is PCI accredited).
However, as mentioned above, branches have always had access to
line by line transaction data each day and this data records the
method of payment (e.g. cash, cheque or card).
Data that is available but after 42 days is no longer available (this
was extended to 60 days)
207. On the original Horizon system, line by line transaction
data was available in branch for 42 days after a transaction
occurred. On Horizon Online (since 2010), this data is
available for 60 days.
208. The Report considers that with data only being available
for a limited period of time, it may not be available to support
a challenge by a Subpostmaster to a Transaction Correction that
may be issued after the date that data can be retrieved (ie.
beyond 42 or 60 days). The Report states that this restricts
Subpostmasters' ability to challenge Transaction Corrections.
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209. What the Report does not take into consideration is that
Subpostmasters may challenge a Transaction Correction without
transaction data. Transaction Corrections are also often
preceded by an enquiry and so even if the Transaction Correction
is beyond 42/60 days then an enquiry may well have been received
within the period enabling the matter to be investigated within
the 42/60 day period. There is a wide range of evidence that can
be provided to review or challenge a Transaction Correction.
often it is very product-specific and not a general view across
all data entries. Typically, the necessary data is kept in
branch records rather than on Horizon. These documents should be
retained beyond the period that data is available through
Horizon and is used by Subpostmasters to challenge or review a
Transaction Correction.
210. For example, if a branch wishes to contest a Transaction
Correction relating to ATM transactions (see section 8 above),
the information needed is on the paper "Totals Receipt" printed
daily by the ATM which shows how much cash has been dispensed by
the ATM and other important information. This receipt must be
retained in branch. No access to Horizon data is needed as all
the necessary information is on the "Totals Receipt”.
2il. The general proposition in the Report that Horizon data
needs to be available for more than 42 or 60 days is incorrect.
Any challenge to a Transaction Correction, and the data needed
to make that challenge, must be considered on a product by
product basis. Post Office is prepared to investigate any
product-specific allegation that there is insufficient data or
information available to Subpostmasters to challenge and review
Transaction Corrections. It is confident that it will be able to
show that sufficient information is available to Subpostmasters.
Data that is not available after suspension
212. Paragraph 14.15 of the Report highlights that some
Applicants were, following their suspension, refused access to
data and their own records that may have been seized upon audit.
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As a result they say that they were unable to defend themselves
from any claim made by Post Office for the recovery of monies.
213. Whilst Post Office is aware that some Applicants have
raised the issue that their own records were removed and not
returned to them, there is no evidence produced or referenced by
the Report to support the position that this has prejudiced an
Applicant in any way.
214. As to other branch records, these are the property of Post
Office. In the event of a Subpostmaster being suspended, Post
Office may take away some branch records for investigation.
Giro Transactions
215. A connected issue that is considered at paragraph 21.4 of
the Report is the process relating to Giro Transactions (under
the heading ‘other counter-errors that benefit customers at the
expense of the Subpostmaster’). Giro Transactions are, in
essence, deposits of cash into a customer's bank account.
Previously, this involved a two-part paying in slip with one
copy retained by the customer and the other accepted by the
branch and then despatched to the processing bank (Santander)
with the last Royal Mail collection of the day. At the end of
the day, the branch copy could be cross-referenced to the entry
made on Horizon to check for any errors by the branch in keying
in the wrong figure into Horizon. This process changed to a chip
and pin system using a swipe card at the request of the
processing bank (Santander) that ran the Giro banking service.
Following the change, no deposit slip would be presented by the
customer.
216. The Report states that due to the change in this process
there is nothing to allow the Subpostmaster to check whether or
not the cash deposit entries on Horizon reflected the amount of
cash deposited and this increases the risk to Subpostmasters.
This is incorrect.
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In terms of the accuracy of the accounting entries for the
deposit, historically, with paying-in slips, there was a risk
that the deposit value on Horizon (as manually keyed in) and the
actual amount deposited to the customer's account (as per the
paying in slip) could differ and generate a discrepancy. Hence
the need for the end of day cross-check. Under the chip and pin
system, there is less likely be an accounting error as the
amount entered into Horizon by the Subpostmaster is confirmed on
the chip and pin pad by the customer. Therefore the amount
deposited to the customer's account is always the same as the
amount on Horizon. The move to chip and pin has therefore
eliminated the risk of an accounting discrepancy.
However, if a branch takes more or less cash than the
recorded value of the deposit, then that is a cash handling
error for which the branch is responsible. Even with a paying-in
slip, there was no guarantee that the amount of physical cash
handed over by a customer was accurate. The paying-in slip only
evidences what the customer intends to deposit (assuming it is
completed correctly); it does not evidence the amount of
physical cash handed over (which could still have been
mistakenly counted). The only check that can be conducted to
ensure the correct amount of physical cash is taken from a
customer is a manual cash count at the point of the transaction.
This manual cash count is needed whether the deposit is by
paying in slip or chip and pin card. Any discrepancy arising
from a cash counting error therefore lies solely on the branch.
This is the same process used by all high street banks
which have also moved away from paying in slips to card based
deposits.
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Post Office's response to section 15 - Transactions not entered by
Subpostmaster or their Staff
220. Section 15 of the Report considers, at paragraphs 15.1-15.3
transactions that have not been entered by the Subpostmaster or
their staff such as where there is an ‘automated transactional
reversal’. This appears to be the same underlying issue as
raised in section 16 - see that section for Post Office's reply.
221. Paragraphs 15.4 and 15.5 allege that there may be a
facility in Bracknell where Post Office can edit transactions
without the knowledge of Subpostmasters. This is denied in the
strongest possible terms. The Subpostmaster who apparently
witnessed this was a member of the NFSP and was on an escorted
visit of a Fujitsu site. He saw a room with Horizon terminals
but these were test terminals, not connected to the main Horizon
network. What he saw was the manipulation of test data ina
test environment. This then appears to have been confused with
what can, or in fact cannot happen. Post Office has provided
Second Sight with a witness statement from the senior member of
staff who escorted the Subpostmaster on the visit, who has
confirmed the above.
222. Forclarity, neither Post Office nor Fujitsu can edit the
transactions as recorded by branches. Very robust safeguards are
in place to ensure the integrity of the data sent by branch
terminals to the Post Office data centre - these are set out in
detail at section 22 below. Although some Applicants have
suggested that they have seen mysterious transactions that they
cannot explain, multiple explanations have been found to show
how these transactions can, in fact, straightforwardly be
explained (e.g. a miskeying error, attached to the wrong stock
unit, logged in using someone else's ID, etc.).
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Post Office's response to section 16 - Transaction Reversals
223. Section 16 of the Report considers the issue of Transaction
Reversals.
224. Transaction Reversals are where part of a basket of
transactions is reversed because the basket is interrupted
before completion (typically due to a power or communication
failure).
225. The Report states that when a Transaction Reversal happens,
Horizon records the reversal against the user ID of the
Subpostmaster or a member of staff. The Report states that this
is misleading because the reversal is ‘automatic’. This
interpretation is incorrect.
226. As far as Post Office is aware, this issue has only been
raised as part of a Spot Review conducted by Second Sight whilst
preparing its Interim Report. The Subpostmaster who raised the
issue which was subject of the Spot Review has decided not to
make an Application to the Scheme and no other Applicant has
raised this issue.
227. As detailed in Post Office's response to the Spot Review
(full details of which are confidential in order to protect the
privacy of the Subpostmaster whom it concerned), the reversals
were caused by the Subpostmaster cancelling a number of
transactions that they were conducting for a customer. The
user's System ID is shown as the person making the reversal
because they initiated the reversal process.
228. The extracts taken from the report by Helen Rose (as quoted
at paragraph 16.3) is taken out of context. The report was
addressing concerns that reversals were not being clearly shown
on the particular data being reviewed (i.e. the ARQ and credence
data being the main transaction data used by Post Office).
However, this data is available on other records that can be
extracted from Horizon. The report makes clear that this is not
an issue with Horizon itself or its data but the way that the
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data it produced was presented within one particular data log.
It does not suggest that there was any entry being made that was
not initiated within the branch by the Subpostmaster or their
staff.
229. This section raises no issue that could be the cause of
losses in a branch.
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Post Office's response to section 17 - Cash and Stock Remittances
(Rems) in and out of the branch
230. Section 17 of the Report focuses on the remittance of cash
and stock to and from branches. Paragraphs 7.16 to 7.29 of the
Part One Briefing describe the remittance process.
231. On occasion, issues can arise such as cash pouches not
being received or there being less or more cash within the pouch
than stated. This will result in a Transaction Correction being
raised.
232. If the cash centre remits a cash pouch to a branch and it
is not received this will not result in a loss to the branch.
The cash centre will investigate why the pouch has not arrived
and ultimately bear the loss. The cash pouch is scanned upon
receipt by the branch and therefore it is only at this stage
that the cash is registered on Horizon as being held in branch.
From this point, any loss of cash is the responsibility of the
branch and the Subpostmaster. There may be some occasions when
the pouch barcode will not scan. In such circumstances the pouch
is entered as received manually by keying in the barcode number.
233. If there is more cash within the pouch than stated, the
branch should report this within 24 hours of receipt. This will
result in a surplus to the branch and a Transaction Correction
is issued to correct the balance on Horizon.
234. In circumstances where the pouch contains less cash than
expected, the matter should be reported by the Subpostmaster
within 24 hours of receipt. The issue is investigated by the
Post Office cash centre. If the cash centre accepts that the
pouch contains less cash due to their error, they will bear the
loss (if any). A Transaction Correction is issued to the branch
to correct the balance on Horizon.
235. Where the cash centre does not accept that it is their
error, the Subpostmaster is invited to review the security
cameras that monitor the loading of cash into the pouch at the
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cash centre. If the Subpostmaster wishes to continue to
challenge the amount received they can do so through the FSC in
the same way that a Transaction Correction is challenged. If
less cash is held on Horizon, a Transaction Correction would be
issued. The loss can be placed in the Suspense Account whilst
the matter is investigated and resolved.
236. A similar process is applied when cash is remitted to the
cash centre from the branch. The amount of cash sent within the
pouch is recorded. If this sum is more or less than anticipated
when received by the cash centre the issue is investigated. The
Subpostmaster has the opportunity to view security cameras that
monitor the movement of the pouch and can choose to accept the
shortfall/surplus or place the loss/gain into the Suspense
Account and investigate the matter further.
237. Paragraph 17.4 deals specifically with the instances where
foreign currency has been accidentally sent to the wrong branch.
The Report speculates that this could result in a Subpostmaster
being responsible for a delivery that was never received.
238. The same process outlined above applies to foreign
currency. If a pouch is not received by a branch it will not be
scanned into Horizon and there will be no increase in cash
holdings. If the pouch is not received there is no loss to the
branch.
239. Where the pouch is taken to a different branch in error it
can be rejected and will be returned to the cash centre. If an
alternative branch accepts the pouch it will be scanned into
Horizon and increase the foreign currency held at that branch.
Transaction Corrections will be issued to correct any
discrepancies that may have been created but overall there would
be no loss to either the branch that received the foreign
currency or the branch that accepted it.
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Post Office's response to section 18 - Missing Cheques
240. Section 18 of the Report discusses the process of remitting
cheques from Post Office branches to Post Office's cheque
processing provider. It considers the situations where cheques
go missing and do not reach the cheque processor, or cannot be
processed by the customer's bank.
241. To assist Applicants, Post Office has set out below the
cheque remittance process and the process followed when cheques
go missing or bounce.
242. In summary, it is inevitable that cheques will occasionally
go missing at some stage in their processing. However, as stated
in paragraph 18.9, provided that the Subpostmaster follows the
correct procedure for processing the cheques in branch, this
will not result in a loss. The cost of a lost or bounced cheque
is only passed to a Subpostmaster where there is clear evidence
that the Subpostmaster has failed to follow proper acceptance or
remittance processes and Post Office has exhausted all other
possibilities of recovering the missing cheque. This is done in
accordance with clause 12, section 12 of the Contract under
which the Subpostmaster is liable for any losses caused by
carelessness, negligence or error.
Process in branch
243. Most Post Office branches are entitled to accept cheques
from customers as the method of payment for a range of
designated transactions. The cheque should be scrutinised by
branch staff to make sure it is not a forgery and the reverse of
the cheque needs to be date stamped, initialled and the relevant
transaction details recorded. This will enable identification of
the specific product and/or customer in the event of an error.
There may be no customer details recorded on Horizon against the
cheque transaction, hence the need to endorse the cheque with
those details.
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244. The method of payment (MOP) by way of cheque should be
recorded on Horizon. When recording a MOP as by cheque, the
customer's cheque is automatically recorded on Horizon as a part
of the branch stock.
245. All cheques taken should be despatched from the branch via
the final Royal Mail collection of the day (except Fridays).
The branch process for remitting cheques is as follows:
a. Subpostmaster produces a cheque listing report from Horizon
(which shows the value of each cheque accepted that day).
b. Subpostmaster verifies that the cheques held in the till
match (volume and value) against the cheque listing report.
c. The total cheque value is then marked on Horizon as being
remitted to POL (known as "remmed out").
[on
A further cheque listing report is then produced. This will
show the cheques being remmed out as a negative value and
the report will now total zero.
e. The cheque listing report is "cut off". The branch cheque
stock will now also be zero.
f£. A Batch Control Voucher (BCV) is manually completed to show
number of cheques, value and despatching branch. The
cheques are attached to the BCV. The cheques are then
despatched for processing in the relevant envelope via
Royal Mail to the cheque processor.
g. Horizon cheque listings and remittance slips are retained
in branch.
FSC process
246. The POLSAP finance system at the FSC is automatically
updated each night from Horizon (for the values of cheques
remmed out from branches). The cheque team in FSC are able to
view this data the day after the transactions and will see the
outward remittances recorded.
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247. Similarly, an electronic file will be received overnight by
FSC from the cheque processor via an automatic upload into
POLSAP which shows the actual cheques received from each branch.
FSC can then compare the values recorded by the branch as
despatched against the values recorded by the cheque processor
as received.
248. Approximately 1,000 entries will remain unmatched each day
(ie. there is a discrepancy between the cheques received by the
cheque processor and the information sent via Horizon by
Subpostmasters about cheque remittances) and could be an
indication of missing cheques. Many cases are resolved quickly
(ie. late delivery by Royal Mail or the Subpostmaster missed the
collection or forgot to put a cheque in a pouch). There will be
around 100 cases per month where it becomes apparent that a
cheque has actually gone "missing".
Investigating lost cheques
249. It is acknowledged that a cheque loss could occur at the
branch, in the Royal Mail pipeline or at the cheque processor.
Post Office's policy is that a branch will only bear the cost of
a lost cheque if the branch has not followed proper procedures.
If the root cause of a lost cheque is unknown or attributed to
some other cause outside the branch, Post Office will absorb
this loss and not pass it on to the Subpostmaster.
250. In the vast majority of cases, Post Office either mitigates
the loss caused by a lost cheque or absorbs the loss itself.
Only a very small number of missing cheque cases result in
Transaction Corrections being issued to a branch.
251. The process for investigating missing cheques is as
follows:
a. The transaction to which a missing cheque relates is (if
possible) identified from the information inputted into
Horizon by the Subpostmaster.
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b. Branches will be contacted when the missing cheque case is
set up to see if the cheque can be found in branch or if
they are aware of which customer presented the cheque which
has subsequently gone missing.
c. If the branch cannot find the lost cheque, a variety of
techniques (depending on product/information available) are
employed to identify the customer and their address from
the transaction data.
ad. The customer is then contacted to request a replacement
cheque. If a replacement cheque is provided then the loss
to Post Office is avoided.
e. If a replacement cheque is not forthcoming, the relevant
client organisation (ie. the product supplier, say Bank of
Ireland, Environment Agency, etc.) is informed that the
payment for that particular transaction has not been
received and the transaction is reversed where possible. By
reversing the transaction the loss to Post Office is
avoided.
f. Alternatively, if Post Office is unable to identify the
customer details, the relevant client organisation may be
asked to try to contact the customer directly for payment.
By payment being made direct from the customer to the
client, the loss to Post Office is avoided.
ge If the transaction related to the missing cheque cannot be
identified or if the transaction is identifiable but
payment cannot be recovered from the customer or the client
and the transaction cannot be reversed, Post Office will
absorb the loss of the cheque provided discussions with the
branch and a review of transactional data does not reveal a
breach of the operational processes.
252. There are two typical scenarios where Subpostmasters have
failed to follow operational processes and will be held liable
for missing cheques:
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a. Cheques have been accepted by the Subpostmaster for a non-
cheque acceptable product. Post Office’s client determines
the method of payment they will accept for the product or
service they are selling through the Post Office and this
is detailed in the operational instructions to branches.
Typically, where the service/product is cash or
instantaneous, then cheques are not acceptable (e.g.
foreign exchange sales) because if these cheques are then
not honoured, the service/provision of cash has already
been provided/taken place and cannot be stopped, or
recovered.
b. The method of payment has not been correctly recorded on
Horizon with the cheque as the MOP and it subsequently
proves impossible to associate any transactions with the
missing cheque. Such an instance will typically be
illustrated by branches recording multiple/all transactions
through “Fast Cash” and then introducing a bulk cheque
value to Horizon via a “Cash/Cheque Adjustment” at the end
of the day prior to remitting out. Again, this may
frustrate Post Office's usual loss mitigation steps
described above.
253. Where a Subpostmaster is held liable for a missing cheque,
a Transaction Correction will be sent to the branch reversing
the remittance of the cheque by the branch. This will return the
value of the "missing" cheque to the branch's cheque stock. If
the branch cannot obtain a replacement cheque from the customer,
there will be a cheque shortage at the end of the trading period
that the Subpostmaster will need to make good.
Bounced cheques
254. Paragraph 18.4 makes reference to specific complaints by
Applicants (rather than it being a common theme amongst
Applicants) that they were liable for cheques that bounced. As
described above, the branch accounts treat cheques like a stock
item. So long as the branch accurately records the receipt of
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cheques from customers and the remittance of cheques to Post
Office, then the branch is not concerned with the banking of any
cheques. The banking of cheques and recovery of payment from
customer's bank is conducted by FSC. Post Office absorbs the
credit risk posed by accepting payment by cheque and should a
cheque bounce, Post Office will absorb the resulting loss.
255. The only exception to this rule is where the branch has
failed to follow operational procedures. This may have included
not completing the details in accordance with a cheque guarantee
card (until these ceased in 2011) or taking payment for a
product where payment by cheque is not permitted.
Transaction Corrections for missing or bounced cheques
256. Paragraph 18.8 makes reference to Applicants not being able
to mitigate their losses as the Transaction Correction for a
missing or bounced cheque has been sent to them too long after
they accepted the cheque. Transaction Corrections may be
delayed on occasions but this is not the fault of Post Office.
In some instances Post Office is dependent on a response from a
third party (such as the customer's bank) before the Transaction
Correction can be issued. This may have resulted in some delay
but, as stated above, if the correct process is followed then
Subpostmasters will not be liable for any lost or bounced
cheques.
257. Typically, however, if there is an issue with a cheque,
thatissue will be raised with the branch through other channels.
In most cases, the branch will be aware of the issue long before
the Transaction Correction is submitted.
Evolving practices
258. At paragraph 18.5, the Report suggests that as practices
have ‘evolved’, Post Office has not expanded the range of
products for which cheques should be acceptable. This causes
Subpostmasters to break Post Office procedures and makes them
liable for missing or bounced cheques. This idea is based on the
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flawed assumption that practices have ‘evolved’ - in fact, the
practices have not changed. It is simply that some
Subpostmasters decide not to follow the correct procedures in
certain circumstances. Where they take that risk, they are
responsible for any resulting losses.
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Post Office's response to section 19 - Pensions and Allowances
259. Section 19 of the Report concerns the risk of fraud taking
place in relation to Pensions and Allowances (P&A) transactions.
In particular, the Report states that Subpostmasters could be
innocent victims of this type of fraud but still liable for the
resulting losses in their branches.
260. For the reasons set out below, P&A fraud by branch staff
can be easily detected by a Subpostmaster before any loss occurs
so long as he/she is carrying out proper end of day checks on
P&A transactions. Subpostmasters are therefore liable for any
losses in their branch caused by P&A fraud as this loss arises
due to their failure to conduct adequate checks.
Benefit payment methods
261. There are various methods by which benefits can be received
by customers:
P&A books
262. P&A books were provided by the Department of Work and
Pensions (DWP) to customers entitled to benefits. A nominated
Post Office branch was set out on the cover of each P&A book,
together with the customer's name and address. Within each book
were (usually) 20 dockets, vouchers or foils (referred to in
this Reply as vouchers) stating the FAD code of the nominated
Post Office branch, voucher number and amount to be paid. The
vouchers were presented to the branch staff, processed through
Horizon and then cash paid to the customer. The vouchers were
despatched each week by each branch to the Paid Order Unit
(which in effect is the DWP) in Lisahally, Northern Ireland.
263. P&A books ceased to be used in circa 2005 and were replaced
by the Post Office Card Account.
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Post Office Card Account (POCA)
264. POCA is a limited service bank account that only allows
benefits to be deposited into the account by DWP and cash to be
withdrawn. Withdrawals are conducted by the customer taking his
POCA card into a Post Office and withdrawing in cash either some
or all of the benefits within his account.
Green Giros
265. Customers who lose their POCA cards or customers who are on
temporary benefits may be sent Green Giros by the DWP.
266. These are cheques (also known as DWP cheques) which set out
the payment amount and can be cashed in the usual way. These
cheques are date stamped and retained by Post Office after
paying the customer. They have historically been accounted for
and despatched by each branch weekly to Alliance & Leicester.
They are now sent to Santander (both banks are referred to in
this note as Santander for ease of reference). Green Giros
should not be confused with Giro Payments which are an entirely
different product.
P&A fraud
267. P&A fraud encompasses a number of different types of fraud,
some of which are historical due to the change in payment
methods over time.
‘Overclaim’ fraud
268. For each benefit payment to a customer recorded on Horizon,
the branch should take from the customer the associated P&A
voucher or cheque and remit each week all vouchers to the DWP
and all Green Giro cheques to Santander. An ‘overclaim’ occurs
when the branch records a benefit payment on Horizon but does
not remit the associated voucher or cheque. Without the
voucher/cheque, POL cannot recover the payment from
DWP/Santander. This places a loss on POL which is then passed
to the branch by way of a Transaction Correction (formerly known
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as an error notice, but referred to in this note as a
Transaction Correction for ease of reference).
269. ‘Overclaims’ are relatively easy to identify as the branch
must record the remittance of vouchers or cheques out of the
branch on Horizon and therefore it is possible to identify any
missing weekly remittance.
270. A fraud can be committed by recording fake benefit pay-outs
on Horizon, which lowers the amount of cash recorded as being in
the branch (as Horizon assumes the cash has been passed to the
customer). This causes a short term surplus (until the missing
voucher/cheque is discovered and a Transaction Correction is
sent through) which can be used to cover other losses or removed
from the branch at the end of trading period (assuming that
there are no other offsetting losses).
Reintroduction fraud
271. Reintroduction fraud is a more sophisticated version of
‘overclaim’ fraud whereby the false benefit pay-outs are
disguised by the submission of duplicate paperwork.
272. In reintroduction fraud, a legitimate benefit pay-out is
recorded on Horizon with cash being paid to a customer but with
the corresponding voucher/cheque not being date-stamped or
remitted out to DWP/Santander. At a later date (typically the
following week), the same benefit pay-out is recorded again on
Horizon. This time, however, no cash is paid to a customer (as
the customer is not present) but the previous voucher/cheque is
date-stamped at the later date and remitted to DWP/Santander.
273. For example, in week 1 there would appear to be an
Yoverclaim’ (amount claimed but no corresponding voucher or
cheque). The amount would be claimed again in week 2 by
submitting the cheque or voucher from week 1 (by this time date-
stamped). The fraud is premised on DWP/Santander not spotting
the missing voucher or cheque in week 1 or the reintroduced
voucher/cheque in week 2. However, in practice, each
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voucher/cheque has a unique reference number which allows
duplicate paperwork to be identified.
274. Each of these frauds has taken place both before the
introduction of Horizon and when Horizon was in operation in
Post Office branches. This is not a Horizon related issue. It is
also largely an historic issue as most benefit payments are now
through POCAs (which are not susceptible to the above frauds)
although some Green Giro Cheques are still processed in
branches.
Fraud prevention in branch
275. It should be noted that ‘overclaims’ and ‘reintroductions’
will not cause a loss to a branch. They generate a cash surplus
which, as long as the cash has not been removed from the branch,
will off-set any later Transaction Correction.
276. It was possible historically - and remains open to a
Subpostmaster now - to carry out immediate checks for P&A fraud
as a Subpostmaster will have access to: (i) each week's batch of
cheques/vouchers and (ii) that week's records of P&A
transactions as recorded on Horizon. It is therefore possible
for a Subpostmaster to easily confirm that the value of the
cheques and vouchers being remitted each week match the value of
benefit pay-outs recorded on Horizon. This would reveal any
‘overclaims’ or reintroductions.
277. For this reason, Post Office does not consider that a
Subpostmaster could be the innocent victim of P&A fraud. If a
Subpostmaster does not follow the proper process for remitting
out P&A documents, and thereby fails to stop any ‘overclaims’ or
reintroductions at source, they are liable for any resulting
losses.
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Post Office's response to section 20 - Surpluses
278. Section 20 of the Report considers Post Office's approach
towards the surpluses that may be generated within branches.
279. As stated at paragraph 20.1, the contract between Post
Office and Subpostmasters allows surpluses to be withdrawn
provided that any subsequent charge is made good immediately.
This means that Subpostmasters may retain surpluses that may be
generated. The report confirms, correctly, that Post Office
views both surpluses and deficits as discrepancies. However, the
Report arrives at the incorrect conclusion that Post Office are
not as concerned with surpluses as they are with deficits.
280. Whenever Post Office discovers a discrepancy that can be
attributed to an error in branch, whether it is a surplus or a
deficit, it will generate a Transaction Correction to correct
the branch's accounts.
281. Where discrepancies occur in branch (say at the end of a
trading period where there is a shortage or a surplus of stock
or cash), it is for the Subpostmaster to dispute the
discrepancy. This is done by contacting the NBSC. As there are
more challenges to deficit discrepancies (and debit Transaction
Corrections), Post Office spends more time investigating
deficits than surpluses.
282. The system processes six million transactions every working
day. Post Office only investigates a discrepancy in branch if
the Subpostmaster requests assistance - it does not investigate
every discrepancy identified in a branch's accounts:
a. First, most discrepancies are fairly small and so do not
warrant a full investigation unless the Subpostmaster
raises an issue.
b. Secondly, the sheer volume of discrepancies would make
investigating them all unworkable.
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c. Thirdly, where a discrepancy arises in branch (ie. the cash
on hand does not match the cash figure on Horizon) an
investigation will require close involvement of the
Subpostmaster and their staff as only they will know how
the branch has transacted its business.
283. The Report's conclusion that Post Office is not concerned
with surpluses is therefore not correct. In any event, it is
noted that this topic does not give rise to any thematic issue
that indicates the Post Office or Horizon is responsible for
losses caused in branches.
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Post Office's response to section 21 - Counter-errors that benefit
customers at the expense of the Subpostmaster
284. Section 21 of the Report considers occasions when customers
may benefit from certain errors in branch to the detriment of
Subpostmasters. This section does not give rise to any thematic
issue but rather appears to raise a series of discrete points.
285. Paragraph 21.1 of the Report highlights that mistakes can
occur when a counter clerk presses the ‘deposit’ icon rather
than the adjacent ‘withdrawal’ icon. This error by a
Subpostmaster or their staff would have the effect of doubling
the size of the error (as the branch will record the receipt of
money into the branch in the accounts which increases the
recorded cash position but will have also handed over cash to
the customer thereby lowering the amount of cash in the branch).
286. Post Office agrees that this error may occur but this would
clearly be an error within the branch, not a systemic problem
with Horizon. In these circumstances the Subpostmaster would be
liable for the error and any loss that has been created in
accordance with section 12, clause 12 of the Subpostmaster
contract.
287. Paragraphs 21.2 and 21.3 are a repetition of the issue
raised in section 23 - on which point, see Post Office's
comments on that section.
288. Paragraphs 21.4 - 21.7 are a repetition of the issue raised
at paragraph 14.1 - on which point, see Post Office's comments
on that section.
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Post Office's response to section 22 - Error and fraud repellency and
Horizon’s ‘fitness for purpose’
289. Section 22 of the Report considers whether Horizon is
sufficiently error and fraud repellent. It raises 4 issues:
a. Has Post Office sufficiently upgraded and developed Horizon
over time?
b. Does Horizon accurately record transactions processed in
branches?
c. Is Horizon resistant to power and telecommunications
failures?
d. I Should Horizon work for every single user no matter their
competence?
Developing Horizon
290. The Report states that Post Office has not sufficiently
upgraded and developed Horizon over the years so that there is a
situation where “errors and fraud that could, in our view, have
been designed out of the system" did not happen. As a result,
the Report alleges that Subpostmasters have been liable for
losses that could have been avoided.
291. This conclusion is unsupported by any evidence and is
incorrect.
292. The Report contains no analysis of the development of
Horizon over the years. It is unclear on what basis the Report
considers Horizon to be under-developed when there has been no
consideration of Post Office's processes for reviewing and
improving Horizon or of the upgrades that have been implemented.
293. Post Office in fact has a number of processes in place for
regularly reviewing and improving Horizon. These include:
a. Incident and Problem Management processes. Both of these
processes ensure that where a branch reports an issue it is
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investigated and resolved. Where several instances of the
same issue occur, then a problem record is created and the
root cause of the issue is identified and fixed (ie to
avoid further instances). The resolution of problems can
sometimes be minor amendments to processes or can result in
a change to the software code via the next release of
upgraded software.
Operational reviews with Fujitsu. These take place on a
monthly basis across a number of different specialist teams
in both Post Office and Fujitsu. The purpose is to monitor
and review past performance, addressing any issues as
required, and to prepare for known changes or upcoming
events.
Operational reviews with the NFSP. These have been in place
for over 10 years and have operated on either a monthly or
quarterly basis across that period. It has involved the
NFSP Executives meeting with senior representatives from
Post Office's IT Service, Network and FSC teams. A number
of operational issues are raised via these meetings and
actions are taken to resolve and improve either Horizon or
associated processes. Other systems are also discussed as
and when relevant eg ATMs.
Continuous Service Improvement. This is a standard process
that Post Office's IT Services operates with all of its
suppliers. Post Office considers that Fujitsu are
particularly good in this area and have, over a number of
years, developed and introduced a number of improvements.
This has included Fujitsu, by their own initiative,
providing additional funds to be used by Post Office for
improvements to Horizon. Fujitsu were not contractually
obliged to do this. The approach agreed with Fujitsu was to
use NFSP's input to drive the improvement initiatives. This
process and the tri-party working, including NFSP members’
active involvement in conducting demonstrations and tests,
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resulted in improvements directly driven by the NFSP and
funded by Fujitsu.
294. Ultimately, the Report appears to agree with Post Office's
position in that it states at paragraph 22.21 that "a number of
enhancements have been made to Horizon following experience and
feedback". Whilst specific examples are not provided as
evidence, this shows that Post Office is engaged in evolving its
systems to improve user experience.
Accuracy of capturing transactions
295. At paragraph 22.23 the Report states that, in Second
Sight’s opinion, for Horizon to be ‘fit for purpose’ for all
users it needs to record and process the wide range of products
and services offered by Post Office and enable Subpostmasters to
investigate any cause of issues that may arise. The Report
concludes that from the cases reviewed, although no specific
examples are provided, that although the core software of the
system works, it may not provide an ideal user experience for
less IT literate users.
296. Horizon is capable of capturing all information and
processing all transactions if used properly. No system errors
have been highlighted in the Report. Further, no examples or
explanations are provided to suggest that Horizon, if operated
in accordance with standard operating procedure, would not
accurately capture transaction data.
297. In fact, of the cases that have been fully reviewed so far,
not one has presented any evidence whatsoever that Horizon did
not accurately record the transactions processed by Applicants
or their staff.
298. Horizon is designed to ensure the accuracy of transaction
data submitted from branches. Safeguards are in place to ensure
that no transactions are lost, altered or improperly added to a
branch's accounts:
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299.
. Encryption. Transmission of transaction data between
Horizon terminals and the Post Office data centre is
encrypted.
. Net to Nil. Baskets*® must net to nil before transmission.
This means that the total value of the basket is nil and
therefore the correct amount of payments, goods and
services has been transacted - as the value of goods and
service should always balance with the payment (whether to
or from the customer). Baskets that do not net to nil will
be rejected by the Horizon terminal before transmission to
the Post Office data centre.
. No partial baskets. Baskets of transactions are either
recorded in full or discarded in full - no partial baskets
can be recorded.
No missing baskets. All baskets are given sequential
numbers (called "Journal Sequence Numbers" or JSNs) when
sent from a Horizon terminal. This allows Horizon to run a
check for missing baskets by looking for missing JSNs
(which triggers a recovery process) or additional baskets
that would cause duplicate numbers (which would trigger an
exception error report to Post Office / Fujitsu).
. Secure data store. Transaction data is stored on a secure
audit server. All transaction data is digitally sealed -
these seals would show evidence of tampering if anyone,
either inadvertently, intentionally or maliciously, tried
to change the data within a sealed record.
In summary, Post Office remains confident that Horizon
accurately records transaction data and the Report presents no
evidence to change this conclusion.
2 See paragraph 7.15 of the Part One Briefing for an explanation of "baskets".
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Power and telecommunications failures
300. Despite the assertions made in this section of the Report,
Post Office maintains that Horizon is capable of handling power
and telecommunications problems. There is no evidence to suggest
that either of these events would cause losses in branches where
the recovery process has been correctly followed by branch
staff. There is also no evidence to suggest that the recovery
system may, as suggested in paragraph 22.8, “not always have
performed as it was meant to after a reboot” or to support the
conclusion made in paragraph 22.15. There is, however, evidence
of branch staff failing to follow the recovery process properly.
This would cause discrepancies in a branch’s accounts and could
be a cause of losses. It is, however, the result of human error
by Applicants or their staff.
301. In Post Office branches, Subpostmasters are responsible for
power supplies and the cabled telecommunications line (see
paragraph 5.6 in the Part One Briefing Report). Interruptions in
power supplies and telecommunication lines are a risk faced by
all IT systems. There are, however, recovery systems built into
Horizon to prevent losses occurring where there is a power or
telecommunication failure. The following is a description of the
recovery process:
a. Following a failure to contact the Data Centre and complete
a transaction, the system would automatically carry out a
retry and attempt to save the basket to the Data Centre
again.
b. Following the failure of the second attempt, a message
displays to the User informing them that there was a
failure to contact the Data Centre and asking them if they
wish to Retry or Cancel. It is recommended that Users only
"Retry" a maximum of twice.
c. When the User selects "Cancel" this results in a Forced Log
Out. This means:
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i. Horizon would cancel those transactions that could be
cancelled.
ii. Horizon would then print out 3 copies of a
Disconnected Session Receipt (one for the customer,
one for branch records and one to attach to the till
to aid with recovery).
iii. The receipt would show transactions that are either
recovered or cancelled. Those products considered
recoverable must be settled with the customer in
accordance with the Disconnection Receipt.
iv. If a transaction is cancellable then stock should be
retained by the branch.
ve Horizon would then log out the active user.
d. The Subpostmaster should then make sure that, in accordance
with the Disconnect Receipt, the Customer is provided with
any funds due to be returned to them in accordance with the
Disconnect Receipt.
e. The system would then display the Log On screen. The User
may then attempt to Log On again.
f. As part of the Log On process, the system checks the
identity of the last Basket successfully saved at the Data
Centre and compares it with the identity of the last Basket
successfully processed by the counter. If the last basket
saved in the Data Centre has a higher number than that
considered to be the last successful basket processed by
the counter, the recovery process at the counter would then
repeat the process that the counter had carried out at the
point of failure.
g. A Recovery receipt would have been printed reflecting these
transactions.
h. A message is displayed to the user confirming that the
recovery is complete. They then return to the Home screen.
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Depending on the transactions being conducted at the time,
the user may be asked a series of questions to complete the
recovery process.
302. It is noted that in Second Sight's Interim Report in 2013,
it specifically looked into this recovery process following a
telecommunications failure. Second Sight found that the
recovery process worked but questioned the speed of the response
from Horizon.
303. In the latest version of the Report (at paragraph 22.5
onwards), Second Sight has raised a single new challenge to the
recovery process. It says that it believes that sometimes key
messages are not displayed on the Horizon screen during the
recovery process. Unfortunately, Second Sight has presented no
evidence to support this allegation. This situation has also not
been raised in any case seen by Post Office and so it cannot
comment further. Until such time as Second Sight is able to
substantiate this speculation, Post Office maintains that the
recovery process is robust.
Fitness for all users
304. At paragraph 22.25, the Report notes that there are some
people who are unsuited from the outset to using a computerised
branch. How this relates to the question of whether Horizon is
fit for purpose is unclear.
305. Horizon is operated by thousands of Subpostmasters, the
majority of whom have not had any issue with the system or the
effectiveness of it. Whilst a small number may find the
operation of the system difficult, this does not make Horizon
not fit for purpose. The subjective experience of a few people
is not evidence that an IT system is objectively not fit for
purpose.
306. For this assessment to be carried out, the Report would
need to identify some form of industry benchmark against which
to judge Horizon. Also, the phrase ‘fitness for purpose’ has a
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specific legal meaning and is
Second Sight has no expertise
does not establish or seek to
benchmark and so its findings
robust analysis.
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therefore a subject on which
to offer an opinion. The Report
articulate any legal or industry
are unsupported by evidence or any
307. Post Office maintains that the fact that almost 500,000
users have used Horizon since
its inception and only 150 have
raised a complaint to the Scheme shows that it is fit for
purpose.
308. Post Office rejects the assertion made at 22.31 that it
does not improve its processes. The Branch Support Programme was
established to consider what more could be provided to improve
the effectiveness of the support that Post Office provides to
Subpostmasters and operators in the running of their Post Office
branches from an operational and engagement perspective. This
work is continuing and involves:
e reviewing the life cycle of the Subpostmaster and all touch
points with the business;
. taking input from owners, users and recipients of Post
Office policies and processes;
. designing policies and processes that deliver improved ways
of working with the Subpostmaster network in a cost
effective and engaging way;
. implementing improvements as soon as possible.
309. The focus of the Programme is predominately how the
business supports the agency network and the policies and
processes that impact on the Subpostmaster. However, where the
issues are the same for the Crown network then these are also
included within the scope of this Programme.
310. Post Office therefore does look to improve its processes as
any prudent business does.
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Post Office's response to section 23 - One-sided transactions
311. Section 23 of the Report comments on what it calls ‘one-
sided transactions’. These are transactions that the Report
states have not fully completed all the constituent parts of the
transaction. This is either because: (i) there has been a charge
to the customer for goods or services but they do not receive
the goods/service; or alternatively (ii) a transaction is
processed but the customer's bank account is not charged for the
purchase.
312. The Report speculates that these situations could, somehow,
give rise to a loss to a Subpostmaster. Thus far, Post Office
has not been presented with any evidence that there is a general
issue with Horizon or Post Office's processes that could give
rise to the above scenario.
Safeguards
313. The Report suggests at paragraph 23.2 that one cause for a
‘one sided transaction’ is due to a telecommunications failure.
Post Office accepts that telecommunications issues can give rise
to ‘one-sided transactions’. This is an inevitable risk of
transacting business across the internet and affects all
retailers and banks. Also, like all retailers and banks, Horizon
has recovery processes in place to rectify any ‘one sided
transaction’ errors. These safeguards are specific to
particular products so it is not possible to explain them all in
one document.
314. Communication failures can have two broad impacts. The
main impact would be the type of interruption that is addressed
by recovery prompts that are referred to in section 22 of this
Reply.
315. The other impact (which would affect the customer, not the
Subpostmaster) would be where a debit card payment was
interrupted after the bank had ring-fenced the customer funds
for the payment but before the counter confirmed that the
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transaction was complete. This can lead to a situation where
although there is no issue for the branch accounts, the customer
is no longer able to draw down on funds in their bank account
because they remain ring-fenced for the original attempted
transaction. Banks have routine processes to clear down ring-
fences within a couple of days or on an accelerated basis by
specific enquiry. This would not affect branch accounts but
could, of course, lead to customer complaints to their banks.
No risk to branches
316. From a branch's perspective no discrepancy will arise from
a ‘one-sided transaction’ as the branch accounts are based on
the information received by Horizon and not on the information
held by a third party client.
317. If a transaction is recorded as completed on Horizon, then
the accounts will also have recorded a corresponding payment
from the customer or the handing over of cash or stock to the
customer.
318. If Horizon records the transaction as failed, then the
transaction will not complete on Horizon and no payment, to or
from the customer, will be recorded. Likewise, as Horizon
records the transaction as failed, the branch staff should not
hand over any cash or stock to a customer.
319. Regardless of whether the client's IT systems record a
completed transaction or not, the effect of the above is that
the branch accounts will be in balance. The fact that there may
be a discrepancy between Horizon and the third party client's
records does not, as described above, change the branch's
accounting position.
320. For this reason, the statement at paragraph 23.11 about
Post Office's Suspense Account is inaccurate. The safeguards
described above ensure that any sums held in the Post Office
central Suspense Account are investigated as fully as possible.
In any event, the releases to profit should be considered within
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the overall context of Post Office performing around 2.5 bn
transactions per annum, with a combined value in the order of
£60bn. The amount of unresolved credits that end up in Post
Office’s P&L is therefore less than 0.001% of all transactions
(by value) undertaken by branches.
Branch awareness of this issue
321. At paragraphs 23.3-23.7 the Report states that the only way
a one-sided transaction would be discovered is if the customer
was to notify the branch. The Report goes on to suggest that
where the customer has benefited from the transaction (i.e. they
have received goods which they did not pay for) they would not
be aware or would not say anything. Therefore, the
Subpostmaster would only be aware of the error if the customer
disclosed it.
322. For the reasons stated above, this view is incorrect and,
in any event, irrelevant as a branch will never be liable for an
error caused by a ‘one sided transaction’.
Conclusion
323. In summary, whilst the Report fails to prove that this is a
thematic issue of general application, Post Office has
demonstrated that a ‘one-sided transaction’ cannot give rise to
a loss to Subpostmasters.
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Post Office's response to section 24 - Hardware issues
324. Section 24 of the Report makes some general comments and
observations about Horizon terminals and other associated branch
hardware. However, the Report does not present any evidence to
support its speculations nor does it clearly identify any issues
that may be common to many Applicants within the Scheme.
325. Post Office accepts that hardware problems can arise and
that equipment is replaced from time to time. However, this is
very dependent on the circumstances of an individual case and
does not give rise to a thematic issue.
326. Further, the Report does not attempt to undertake any form
of statistical analysis or industry benchmarking. In this area,
it would be common to see an assessment of ‘mean time between
failures’ as a way of judging performance.
327. In any event, as described at in section 22 of this Reply,
there is a recovery process in place to manage hardware
failures.
328. Paragraph 24.1 of the Report highlights that some Horizon
equipment is more than 10 years old. Whilst this may be
correct, there is nothing to show that the age of the equipment
is a cause of any losses.
329. At paragraph 24.2 the Report states that there is little
routine hardware maintenance. This is correct but equipment is
replaced as and when needed and this is industry standard
practice.
330. Paragraph 24.4 states that many Applicants believe that
faulty equipment could be responsible for the losses suffered.
This is not correct and no evidence has been put forward to
support the view that hardware issues have caused losses in
branches.
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Post Office's response to section 25 - Post Office Audit Procedures
331. The Report says at paragraph 25.1 that Applicants were not
provided with copies of audit reports, although it does
acknowledge, at paragraph 25.2, that Post Office's current
practice is to provide each Subpostmaster with a copy of any
audit report. The practice of providing a copy of the audit
report has always been in place.
332. Post Office is not aware of Applicants not being provided
with copies of audit reports when requested however Post Office
cannot categorically say that this has never happened in an
individual case. Nevertheless, the lack of access to an audit
report is not a cause of losses in a branch and would not
exonerate a Subpostmaster from their contractual responsibility
to make good losses caused in their branch that were revealed by
an audit.
333. At paragraph 25.3 onwards, the Report repeats the concerns
of Applicants about the scope and conduct of Post Office audits.
However, it does not offer any opinion or analysis of those
concerns. For its part, Post Office has found no evidence in
any of the cases reviewed to substantiate allegations that it
auditors acted improperly
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Post Office's response to section 26 - Post Office Investigations
334. This section of the Report provides Second Sight's opinion
on the process that is undertaken by Post Office when it
investigates criminal activity in branches.
335. This topic is outside the scope of the Scheme (which is to
consider "Horizon and associated issues") and is also outside
the scope of Second Sight's expertise. Second Sight, as forensic
accountants and not criminal lawyers, are not qualified to
comment on Post Office's prosecution processes.
336. This is highlighted by the statement in the Report that the
focus of Post Office investigators is to secure an admission of
false accounting and not to consider the root cause of any
losses. This is incorrect - Post Office investigators’ first
job is to establish what has happened in the branch.
337. By falsifying the accounts (whether through the inflation
of cash on hand or otherwise) Subpostmasters or their assistants
prevent Post Office from being able to identify the transactions
that may have caused discrepancies and losses. The first step in
identifying a genuine error is to determine the days on which
the cash position in the accounts is different from the cash on
hand. Where the cash on hand figure has been falsely stated,
this is not possible.
338. The false accounting therefore hides any genuine errors
from Post Office and a Subpostmaster. It hides it at the time
the losses occur and it remains the case now that Post Office is
not able to identify which transactions may have caused the
losses. The Report is therefore entirely incorrect in its
evaluation of how Post Office approaches prosecutions. It is the
Subpostmaster's (or their assistant's) false accounting that
prevents Post Office from investigating the underlying losses,
not the attitude of Post Office investigators.
339. Given that this is a topic on which Second Sight can offer
no expert opinion, this Reply does not comment on this section
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of the Report other than to confirm that it rejects all the
Report's findings.
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