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Three Practical Steps Law Firms Should Take to Comply with the New CHAPS Purpose Codes


What Law Firms Need to Know

From 1st May 2025, UK banks will require the inclusion of purpose codes for all payments made through the CHAPS system. The introduction of purpose codes is part of a wider initiative to improve data transparency and enhance the efficiency and security of high-value payment processing in the UK.


Although the operational changes are relatively simple, law firms should take steps to ensure they are informed and prepared. Doing so will help to maintain smooth payment processes and minimise the risk of delays or queries from banking partners.


What Are Purpose Codes?

Purpose codes are standardised, short alphanumeric codes that indicate the reason for a payment. They provide additional clarity on the nature of a transaction, enabling banks and payment systems to capture consistent and meaningful data.


The use of purpose codes assists with a number of regulatory and operational objectives, including:

a)        Improving the quality of payment data

b)       Enhancing transparency

c)        Supporting anti-money laundering (AML) and sanctions screening

d)       Aligning the UK’s payments infrastructure with international standards, specifically ISO 20022


ISO 20022 is a global messaging standard for financial transactions that facilitates better data sharing and interoperability between financial institutions. The adoption of purpose codes within CHAPS payments is part of the UK’s move to this standard.


Why Are Purpose Codes Being Introduced for CHAPS Payments?

Historically, CHAPS payments (Clearing House Automated Payment System) did not require a purpose code. However, many cross-border and international payments already rely on them. The inclusion of purpose codes for CHAPS payments brings domestic transactions in line with international practices.


The change supports efforts by financial institutions and regulators to improve the integrity and security of payment systems. Better data quality makes it easier to detect suspicious activity and enforce compliance with anti-financial crime regulations. It also improves the efficiency and traceability of payments across the financial system.


What Is the Likely Impact on Law Firms?

For most law firms, the introduction of purpose codes will result in minimal disruption. Typically, when a law firm instructs its bank to make a CHAPS payment, it provides plain English details of the transaction. The bank then applies an appropriate purpose code based on this information.


However, given the range of codes it is likely that law firms will be asked by their banking partners to provide the appropriate codes. As a result, law firms should ensure that their accounts and cashiering teams are aware of the changes and are equipped to respond to any requests for information from their banks. This is especially important for firms managing large volumes of client funds and high-value payments.


What Should Law Firms Be Doing Now?

Although the responsibility for applying purpose codes rests with the banks and CHAPS participants, law firms should take practical steps to prepare. We recommend the following three actions:


1. Familiarise Yourself with the Purpose Code List

The Bank of England has published a comprehensive list of purpose codes that will be used for CHAPS payments. It is advisable for law firms to download and review this list so they can quickly and accurately reference the appropriate codes when needed. A copy should be readily available to staff responsible for making payment requests or handling client monies.

You can access the list here: Bank of England CHAPS Purpose Code List (PDF)


2. Provide Clear and Accurate Payment Instructions

Ensure that payment instructions to your bank are detailed and precise. Providing complete and accurate information about the purpose of a payment will enable your bank to apply the correct code without delay. This will reduce the likelihood of additional queries or delays in processing high-value transactions.


3. Review Internal Processes and Train Relevant Teams

It is important that accounts and cashiering teams are aware of the new requirements and understand how to respond if the bank requests clarification or a specific purpose code. Firms should consider updating their policies and procedures where relevant and providing training to staff as part of their regular compliance updates.


Where to Find Further Information

In addition to the Bank of England’s purpose code list, several major banks have published guidance on the changes to CHAPS payments and the use of ISO 20022 standards. We recommend reviewing the relevant resources from your banking partners:


Key Takeaways for Law Firms

The upcoming changes to CHAPS payments are part of a broader move towards greater standardisation and improved data quality within the UK’s financial system. For law firms, these changes are not expected to create significant operational challenges. However, taking proactive steps will ensure compliance and prevent any disruption.

By familiarising teams with the purpose code requirements, ensuring clarity in payment instructions, and reviewing internal processes where necessary, firms will be well-positioned to adapt to the new framework.


As the 1 May 2025 implementation date approaches, maintaining open communication with your banking partners and staying informed about any further updates will be key to a smooth transition.


About the Author

Paul McCluskey is the Managing Director of Gemstone Legal, a specialist consultancy in law firm finance and risk management. He is an approved Lexcel assessor and consultant with the Law Society of England and Wales, and an independent, regulated finance broker. Paul works with law firms to improve financial and banking arrangements, offering access to enhanced deposit interest rates and funding solutions to support business growth.


Contact Gemstone Legal to discuss your banking and finance needs.



 
 
 

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