Friday, 17 January 2014

Direct Debit Rules (an evil thought)

A Direct Debit Instruction is an authority allowing an originator to collect money from your bank account. There are rules they have to follow for this.

The main one is that they give you at least the agreed notice (normally 10 working days) that they will collect, specifying an amount and a date, and then they have to collect that amount on that date. They are allowed up to three days late, but not allowed to collect early or a different amount. They are not really complicated rules.

Annoyingly some people get this wrong, and the banks offer their customers a guarantee. The wording of this guarantee has changed a few times and there are a couple of key points on the latest wording which I found interesting.

The first point is that the new wording now says "If an error is made in the payment of your Direct Debit" rather than "If an error is made". The error still has to be made by the originator or the bank, but the new wording is much more specific. This is good, as previously one could reasonably argue that invoicing the wrong amount, or even making an error in providing some service, was "an error ... by the originator ... " and so a reason to claim on the guarantee. The new wording is narrower and relates only to an error made with collecting the Direct Debit. I am sure this is what they always meant, but new wording is clearer, good.

The other change is subtle too, it adds "If you receive a refund you are not entitled to, you must pay it back when [originator] asks you to.". We'll ignore the fact that it should be "... to which you are not entitled ..." for now. This made me wonder - have people made bogus claims and refused to repay them? Maybe.

But this led me to ponder the whole basis for claims under the Direct Debit guarantee.

Let's suppose someone collects money from me under a Direct Debit, but did not give the correct notice. Something simple and provably wrong. I have had this lots of times, and even had a letter from someone that was dated later than 10 days notice with "This is your 10 working days notice of collection" on it. So, within the one letter, it was clearly wrong. This is a valid reason to claim on the Direct Debit guarantee.

So, you claim from you bank. This is a claim on a guarantee your bank offers you. It is part of an agreement between you and your bank. They pay up (the refund). Good, but this is entirely a matter between you and your bank.

Then, the bank are out of pocket here. But they have an indemnity policy (an insurance policy) with the originator. This is part of becoming a Direct Debit originator - you have to indemnify all of the banks against any losses they have. The originator is insuring the banks. So the bank claim on that, and the originator pay the bank. This is a matter between the bank and the originator.

All good. But what has someone paying out on insurance go to do with me, as the person that claimed on a bank guarantee. I would have complied with the contract with the originator and paid by DD. This is not a "reverse the DD payment, reclaim the DD payment, or reject the DD payment", it is a "claim from the bank on a guarantee the bank gave me". The fact that the originator is out of pocket is down to them providing an insurance policy to the banks. Insurers always risk being out of pocket. How is that my problem? I am not even the one that created the insured event, it was the originator themselves making a mistake that did so. It is the bank that refunded me, not the originator.

So, technically, do you owe the originator the money back?

The new clause on the Direct Debit guarantee does not cover this, as it only covers cases where you claim but are not entitled to claim. In this example, you are entitled to claim as there was a mistake.

So legally, can the originator actually ask for the money again?

Just a thought.

Where this gets really interesting is when a supplier goes bust, is wound up and no longer exists. You can still claim against the bank on DD guarantee (if you have a valid claim, i.e. a mistake was made in the collection). The fact that the bank cannot claim against the now defunct originator is not your problem as the bank still exist and they still provide that guarantee.

[Before you ask, A&A have this sown up in the contract terms and make it clear that such a claim against the bank is counted and un-doing the original payment and as such the money is again owed, but I am not sure every DD originator has this spelled out in their contracts.]

26 comments:

  1. I suspect that, if it came down to it, the courts would find that the Direct Debit was reversed, and you as the claimant caused the Direct Debit transaction to be undo; they would then say that the indemnity you offer the banks as an originator is not about the original charge itself, it's about any further costs the bank incurs as a result of the reversal of the original transaction (e.g. borrowing costs if the customer goes into overdraft as a result).

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    1. Well, maybe, but to be clear - behind the scenes, the collection of the refunded payment by the bank is very very specifically done as an Indemnity claim. Yes, you cover consequential losses and stuff too, but the refund is done as an indemnity. This is different to a bounce or reject (done on day or day after of payment) where the collection "fails", which can be due to lack of funds, etc. The fact that one could claim on a DD guarantee when originator does not exist any more (which I am pretty sure is the case) does rather help clarify this I think - it can't simply be a reversal of the collection if that is the case.

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  2. Is the A&A contract actually correct there, since the claim *isn't* really a reversal of the original payment, but me claiming money I'm entitled to from a third party? In effect, I suppose it's A&A requiring each customer to insure A&A against having to pay out on that bank insurance policy, which just about makes sense.

    I'm quite confident A&A get it right anyway, making it academic, but that clause does grate. If I were to claim wrongly, fair enough, reverse the claim (as already provided by the DD terms) - but this seems to imply that even if A&A were to screw up, any refund to which the DD contract entitles me is cancelled out, so the "guarantee" ultimately gives me nothing anyway?

    Of course, after my mother going through the absurdity last year of her bank telling her to make a claim against them under the guarantee scheme to correct their own charging error, trusting the bank to get it right seems rather naïve at best...

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    1. Banks are odd over this - DD guarantee is not new but I find that half the bank staff, even those who have been there years, do not understand that it is even possible let alone how to do this. It is actually quite useful the way the scheme rules insist on everyone getting a copy of the guarantee, else people would have no idea that they are entitled to claim and no evidence to wave at the bankers.

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  3. Yes - questions like "why can't you just refund the money you took by mistake?" and "why do you have to reverse the whole payment then get me to pay the right amount again, rather than just refunding the excess amount?" stumped them all completely, even before the call centres on two different continents confused matters further. They were surprisingly willing to hand over compensation as it escalated, but actually correcting the root problem (a loan management script unable to distinguish credit balances from debit) was apparently beyond everyone's ability. If you pitched it as a comedy script, everyone would think it too far-fetched!

    Still, I suppose it's no worse than having BT Openreach guys standing here telling me they can't do the job they were sent to do, because BT sent the wrong paperwork - they confirmed at the time that it was indeed BT's own mistake, and that the unticked box had no cost implications either way - but still, that wasn't enough, they'd have to come back another day with the correct paperwork.

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  4. It sounds like they've closed the "loophole" of invoicing you the wrong amount. If you've never had a utility company mistakenly take a grand from your account for a month's worth of service, that must be really nice. If you ask me, that's exactly the sort of thing the DDG was set up for.

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    1. The DD guarantee was specifically to stop errors in the payments. DDs have never been about invoices, they are a payment method. Mistake like invoices is one reason you have to get advance notice of the collection - that way you have every chance to sort the mistake before collection. But either way, at least it is clear now.

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  5. I have known of some apparent case where someone submitted an DD guarantee claim for ongoing recurring payments which were supposedly being collected on the wrong date claiming back all monthly payments going back to day one for several thousand of pounds. The payments were on the advised collection dates but not the originally specified date on an application form but however had been going on for a significant period without any query; the payers bank apparently actioned the refund on the basis on a copy of the original application form. Now the originators bank washed there hands of the matter having processed the clawback with the opinion that the originator needed to take the matter up with the customer. Now the crux of the matter, before the claim was even notified to the originator the customer had entered a insolvency proceedings... how all very convenient, I wouldn't like to speculate on that one in relation to who might have "advised" on that but needless to say it stank! No idea if they ever got a resolution but the last I heard was it looked like a bit to be a case of joining the queue for the remnants but the banks really didn't give a damn once they had there money back!

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  6. There is a counter claim process the originator can do to the bank of the claim was not valid. There are complicated rules but that sounds like one they should have done. I suspect leaving the bank holding the ball.

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  7. I agree with Jas88 “why should we repay the whole amount rather than refunding the excess amount”. Despite the guarantee it seems like it still takes a lengthy procedure to get the payment sorted. The great thing about payments made using Direct Debits is that they reduce the risk of missing payment deadlines and incurring late payment fees. Any good Direct Debit service provider (AccessPay, for example) can help keep errors and risk to a minimum, with features built into their automated Direct Debit Management Solution.

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  8. I am strongly of the opinion that the Direct Debit Guarantee is completely worthless after my brush with incompetence. The insurance company "forgot" to take their monthly payment for at least three months. I wrote to them regularly reminding them of their error as I didn't want them to cancel that policy for "failing to make the payments". Eventually they put through a manual debit for the outstanding amount, and re-started the direct debit but at the point at which it had stopped! So I paid twice, and as a result went overdrawn. My caring sharing bank immediately took the opportunity to whack overdraft charges onto the account which made me even more overdrawn. There would have been enough in the account if they had only taken what was their due. It probably took another six months before I got the over debit back and the overdraft charges refunded as a "gesture of goodwill and without admission of liability".

    So I don't use direct debit these days without a VERY good reason. Yes I'm thinking about migrating to AAISP, but the DD issue is holding me back. The banks have it all sewn up. No matter what goes wrong, in particular no matter how badly the bank screws up, it is always the customer's fault and the customer shall pay.

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    1. If ever we (AAISP) make a mistake we will send back the balance over charged. In back we even have an automated system so that the sales staff correcting an invoice (issuing credit note) triggers the refund and notifies the customer. There are obviously time and money limits on the automated process to avoid a typo causing problems :-) But please don't worry about AAISP and DDs. We try very hard to get it right, like everything else.

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  9. I like direct debits!! They pay me when they screw up!! I have a finance agreement for my car and being a pensioner, for a modest amount. The term of the agreement is 4 years with payment arranged by the ubiquitous DD on my bank account. What they forgot to do was send me regular statements as required to do by the FSA or whoever imposes such conditions, making them at default for charging interest over 2 of the 4 years and so the lovely jubly arrived out of the blue in the form of a bankers cheque for +-£600 (or it's equivalent in FF!).
    Up to this point, I had no truck with Direct Debits, resisting all attempts to convince me it was safer and better this way, after all, who in their right mind is going to give all your banking details to someone or organisation you have never met or come across before, giving them absolute control over what they can withdraw from your account, plus if they go bust, taken over, who else is going to have your details. Common sense tells you all you need to know even if they do screw up on occasion.
    Don't touch DD with a proverbial barge pole unless President Putin is guarantor!! Now, where's that bloody statement gone!!

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    1. To be clear - you give a third party the ability to take money from your account, but you have the ability to take it back if there was a mistake, and that is backed by your bank so applies even if the originator goes bust. This is what makes Direct Debits safe.

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  10. What's your take on the "normally 10 days notice" for variable amount direct debits?

    A certain other large retail ISP seem to think that "normally" means "we can specify whatever period of time we like, be it 10 minutes, 10 days, or anything in between".

    I'm rather of the opinion that if an organisation wishes to use significantly less than 10 days it should have a reasonable justification for it other than "we get paid sooner", otherwise it would just say X days.

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    1. You have to give the notice as agreed on the DD guarantee that you provided when they signed up. Yes, 10 working days is usual but the banks are more than happy for you to do what you like in your DD set up, but you have to stick to what you say. E.g. we (A&A) have 5 working days notice. We are therefore have to give at least 5 working days notice and collect on or immediately after (defined as 3 working days) the date we state. Else you can claw back.

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    2. To be clear, the advance notice period is agreed between the Service User (Originator) and their sponsoring bank. In the realm of monthly premiums 5 days is usual as 10 doesn't give much scope for processing a refusal and notifying a change the following month.

      Also, all DDs are now "Variable Amount" by definition, Fixed amount DDs were abolished some years ago (probably to reduce the amount of Advanced Notices being issued)

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  11. Does the notice apply for each payment?

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    1. DD notice can be for each payment or a series of payments or a regular payment, but notice must be given if the payment date or amount changes.

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  12. Does the bank require a copy of the original direct debit mandate to uphold an indemnity claim, as they're not disputing that I have a valid claim. They state that cannot refund me because the mandate was signed six years ago they don't have a copy, so no refund?

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    1. Absolute nonsense. Signed DD mandates were obsolete years ago. Your transaction record shows you have a DD agreement between you and the Service User (Originator) and if you did not, then how could you possibly be refunded for payments incorrecly taken if no agreement was in place? Are you certain that that is the reason given? or are the payments you are claiming against 6 years old?

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  13. I've submitted a dd claim in my branch dating from Feb 2014 till June 2015 for car finance for a car which I sent back I'm requesting all my payments back at over 4 grand do they have to refund and if so how long does it take

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    1. If they did not follow the rules, then you are entitled to an *immediate* refund. Bank should have done it on the spot.

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  14. I'm in the process off a dd claim for car finance for a car that I returned as faulty but was still being charged monthly for over a year resulting at over 4 grand are the bank likely to pay me back and if so how long do these things take ..

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  15. I've submitted a dd claim in my branch dating from Feb 2014 till June 2015 for car finance for a car which I sent back I'm requesting all my payments back at over 4 grand do they have to refund and if so how long does it take

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