Will every UK financial institution receiving payments require its own Sort Code by July 2019?

[Update 29th October 2018 - I have been asked to clarify that phase 2 of Confirmation of Payee (CoP) will include support for individual collection accounts for financial institutions without the need for a separate sort code.]   


Will every UK financial institution receiving payments require its own Sort Code by July 2019, as a consequence of the Confirmation of Payee (CoP) implementation?

Currently, many financial institutions use a collection bank account rather than obtaining their own a sort code via their settlement bank. 

Let’s assume ABC Payments Ltd uses their account at XYZ Bank, acting as the settlement bank, to receive payments. Once Confirmation of Payee is adopted in mid 2019, let's imagine that the bank of Mr Patel, who is looking to send money to Mr Jones’ account with ABC, is setting up Mr Jones as a new beneficiary.

The bank will identify that the beneficiary sort code is that of XYZ Bank, and send the CoP request to XYZ Bank. XYZ Bank has no knowledge of the individual accounts held in ABC Payments Ltd books and will respond “No match”.

Mr Patel’s bank therefore will advise him either not to set-up the new beneficiary or to proceed at his own risk. Either way ABC Payments Ltd using a collection account with XYZ Bank, effectively will no longer receive Faster Payments.

A work around may be to advise Mr Patel to add ‘ABC Payments Ltd’ as the beneficiary rather than ‘Mr Jones’. However, if the money is then paid into the account of ‘Ms Fraud’ he will have no CoP protection.

The solution therefore is for ABC Payments Ltd to ask XYZ Bank to assign them a dedicated sort code and then they can allocate a directly FPS addressable account numbers to each one of their clients. They can also participate directly in CoP.

Use of industry modulus algorithms on that sort code, would result in ABC Bank receiving fewer misdirected payments, as keying errors should be caught by the remitter. An additional benefit is that the sort code is portable to another bank, so it is much easier to for ABC Payments to switch banks in the future.

The Payments Systems Regulator @PSR may well be very happy with this perhaps unintended consequence of their mandating Faster Payment participants to implement CoP by July 2019. It improves banking competition and encourages the adoption of CoP and reduces misdirected payments.

Financial Institutions without their own sort code, would be well advised to ask their banks for their own sort code. They will also need to build or buy a service to respond to CoP requests on behalf of institutions like ABC Payments Ltd, using their own sort code so that Mr Patel can receive ‘Matched’ to his CoP request.