December 2009/January 2010
Many consumers find it convenient to make automatic payments from a current account or credit card account for their regular financial commitments, such as mortgage or rental payments, utility bills, subscriptions etc. This spares them the trouble of having to remember when each payment falls due. They may also sometimes benefit from discounts offered by suppliers of goods and services to encourage the use of automatic payments.
Automatic payments are generally made by means of direct debits, standing orders or continuous-payment authorities. The exact nature of these arrangements is not something to which consumers generally give much consideration. But it can be important, if things go wrong.
At one time, standing orders were the most common means of making automatic payments. However, they are now used relatively infrequently. Consumers set up a standing order by issuing their bank with a standing written instruction to pay to a specified business, organisation or individual a certain regular amount (usually monthly, but sometimes quarterly or at other intervals).
Standing orders can be set up to continue 'until further notice' or for a limited period of time. Any subsequent changes, for example to the amount payable or to the date on which the payment is made, must be initiated by the consumer.
And if the consumer decides not to make any further payments, they must cancel their standing order instruction to the bank - it is not enough simply to inform the recipient of the payments that the arrangement has come to an end.
Direct debits work differently. They are put in place after a consumer gives permission to whoever will receive the payments (for example, a gas or electricity provider or a mobile phone company) to debit their account with the payments due. This permission is known as a direct debit mandate - and the business or organisation receiving the payments becomes the mandate holder. The mandate need not be a signed, paper document and is often given over the phone or through the internet.
The mandate holder tells the consumer's bank that it has the mandate, and at agreed intervals will then apply to the bank for the required payment. The amount and frequency of the payment can be changed by the mandate holder, so this is a convenient way of paying bills where the sum due is a variable amount. The arrangement leaves consumers with less control over the payments that can be taken from their account than they would have with a standing order. However, the Direct Debit Guarantee Scheme ensures that if a payment is made wrongly under a direct debit, the consumer is entitled to receive a refund from their bank - even if the fault lay with the mandate holder rather than with the bank itself.
The complaints we see indicate that many consumers find it difficult to distinguish between direct debit and standing order payments - and tend to confuse the features of the two. Unfortunately, such confusion can sometimes be shared by some bank staff too, as we illustrate in case studies 82/04 and 82/07.
Continuous-payment authorities can be set up using plastic cards such as credit and debit cards. They operate on the account to which the card is linked, and appear similar in some respects to a direct debit - in that consumers give their mandate to the business they want to pay, and that business then has control over how much is debited from the account and when.
Unlike a direct debit, however, a continuous-payment authority is not covered by any bank guarantee and can only be cancelled by the business that holds the authority. Consumers often find this surprising. They generally assume the bank or credit card provider will ultimately be responsible for any overpayments, as we illustrate in case 82/01.
Because consumers frequently set up continuous-payment authorities over the phone or through the internet, there is often no paper record of what was agreed. If a dispute later arises, this can make it difficult to establish exactly what happened. As in case 82/02, we sometimes have to reach a decision on the basis of whatever evidence is available.
Underlying the arrangements for continuous-payment authorities are agreements between the banks and the card networks. These contractual arrangements will be binding on those who are party to them. However, that does not include the consumer, who will have no knowledge of the agreement and will not have signed up to it. So in case 82/03 we were not persuaded by the bank's view that, even though the consumer had never given his mandate for the continuous-payment authorities, he should still be liable for the money taken out of his account.
Where a bank or credit card company has made a mistake in connection with an automatic regular payment, it can keep any resulting problems to a minimum by apologising and acting swiftly to put things right.
Case 82/05 illustrates how, by taking extremely prompt action and being willing to 'go the extra mile', a bank limited the amount of upset and inconvenience caused to the customers concerned. This in turn meant that although the bank was required to compensate the customers, we agreed that it was fair for it to pay only a very modest sum.
Because many automatic payments are for significant items, such as mortgage, rent or utility bills, problems can build up very rapidly for the consumer if mistakes are not remedied promptly. This is what happened in case 82/06, where the considerable amount of stress and inconvenience caused by the bank was reflected in the amount of compensation we told it to pay the customer.
The following case studies illustrate some of the cases we have dealt with recently concerning regular, automatic payments.
Mr K set up a continuous-payment authority on his credit card account to pay £1.50 a month to an internet service provider. This payment covered an upgrade to his email account.
After a time, he decided to discontinue the email facility and he said that he asked the internet service provider to cancel the arrangement. However, some eleven months later he noticed that the payments were still being debited from his account.
Mr K asked his credit card issuer to cancel the continuous-payment authority and refund his account with the 11 monthly payments that he said the internet service provider had 'wrongly claimed'.
The credit card issuer explained that it was only able to cancel the continuous-payment authority if asked to do so by the internet service provider. And it said that although it would attempt to reclaim some of the payments for him, it would first need to see some evidence showing the date when he cancelled the arrangement.
Mr K was unhappy with this response. He said the credit card issuer had a responsibility to refund the payments and to prevent the internet service provider from taking any further sums from his account. Unable to reach agreement, Mr C complained to us about both his internet service provider and his credit card issuer.
complaint not upheld
We explained to Mr K that we would look into his complaint about his credit card issuer. However, as we did not cover his internet service provider, we could not help with that aspect of his complaint. We gave him details of a telecommunications dispute-resolution service that he could contact.
The information we obtained from Mr K's credit card issuer showed that the payments were taken under a continuous payment authority that he had given his internet service provider.
Mr K was unable to send us any details of the contract he had entered into with the internet service provider, and he had nothing to confirm that he had asked the provider to cancel his payments. Given these circumstances, and taking into account the nature of continuous-payment authorities, we could not see that there was anything Mr K's credit card provider could have done to get his money back.
We were satisfied that the credit card provider was not liable, under the continuous-payment authority, for any overpayment made to the internet service provider. We also noted that the credit card provider had offered to try to get Mr K's payments back for him, if he could prove that he had asked the internet service provider to cancel the arrangement. We did not uphold the complaint.
Ms A complained to her bank about 12 monthly payments, each for £12.99, that had been made from her current account to an internet service provider. She asked the bank to refund this money and confirm that no further payments would be made, as she said she had never had any dealings with the company concerned.
The bank said it was unable to act on her instructions. It explained that the payments had been taken under a continuous-payment authority that she had given to the internet service provider. She would therefore have to contact the internet service provider herself and ask it to cancel the arrangement.
Ms A said she thought this was unreasonable, and she told the bank that any continuous-payment authority in her name must have been set up fraudulently.
Unable to reach agreement with the bank, Ms A referred her complaint to us. She explained that, as a final-year student, she had little time to deal with the complaint, so she authorised her father to pursue it on her behalf.
complaint not upheld
The evidence provided by the bank did not suggest that there was anything fraudulent about the continuous-payment authority. So we asked Mr A for some more information about his daughter's contact with the internet service provider. We also asked why she had not mentioned the problem to the bank until 12 payments had been taken from her account.
Mr A admitted that he was having difficulty obtaining much information from his daughter. However, she had told him that before contacting her bank she had been in frequent email contact with the internet company for almost a year, in an attempt to get the matter put right.
We asked to see copies of Ms A's email exchanges with the internet company. These indicated that she had agreed a 12-month deal for internet services - but had later tried to re-negotiate the monthly cost. In response to our queries about this, Ms A told us, through her father, that her emails had 'probably not reflected the exact position', as she had 'felt intimidated' by the internet company.
We were not convinced by this explanation. As we were satisfied, from the bank's evidence, that Ms A had given a continuous-payment authority on her debit card for the payments, we said that there was no reason why the bank should refund the money.
Mr C, who had recently started up in business on his own as a health and safety consultant, ordered some business cards from an online supplier, BG Ltd. The total cost was £9.99 and he paid online, using the debit card for his business account.
Several months later, while checking through his bank statements, Mr C noticed that regular monthly payments of £9.99 were being made to two separate businesses. He had never had any dealings with either of the businesses but recognised their names and believed them to be associates of BG Ltd.
He therefore contacted BG Ltd and asked it to arrange a refund. By that stage a total of £139.30 had been paid from his account to the two businesses. BG Ltd sent him only a partial refund, leaving £99.50 still in dispute.
Mr C's bank said it was unable to help, as he must have entered into continuous-payment authorities. Unable to persuade the bank to refund any of the money, Mr C then came to us.
Mr C was able to provide clear and convincing evidence of his transaction with BG Ltd. We were satisfied that he had used his debit card to pay BG Ltd in full for the business cards. However, he had not provided any continuous-payment authorities to the businesses that had subsequently debited his account each month. So we did not consider that the bank had any authority to make those extra payments.
The bank argued that it should not be obliged to refund the money, since the terms of its agreement with the card payment network meant it had no option but to make the payments. We said that Mr C had not been party to the agreement - and had never authorised the payments - so we could not see that he was liable for them. We upheld the complaint and told the bank to refund Mr C's account with the outstanding amount. We said it should also pay him £100 for the inconvenience he had been caused.
Mr V phoned his bank to complain that it had wrongly paid a standing order from his account for £550.
He had set up the standing order to pay his monthly rent. But he said that he had written twice to the bank asking it not to make the payment one particular month, as he had already paid the rent by other means.
The bank told him it had never received his letters. However, it said it would arrange a provisional credit of £550 to his account until it could recall the payment from his landlord.
The following day the bank phoned Mr V and said it would not, after all, be able to recall the payment from his landlord. This was because his rent was paid by standing order, not a direct debit. The bank said it would have to debit the £550 again and it suggested that Mr V should ask his landlord to give him back the amount paid in error. Alternatively, the bank said it could write to the landlord on Mr V's behalf and ask him to send back the money. However, Mr V would first need to provide proof that he had paid the rent for the month in question.
Mr V said he did not consider it was up to him to 'put right a problem that the bank had caused' and he asked the bank to re-credit his account with the £550. When it refused, he instructed it to close his account. There was a small overdrawn balance on the account and the bank said it would write this off, in recognition of the inconvenience he had been caused. Mr V then referred his complaint to us.
complaint not upheld
Mr V sent us handwritten copies of the two letters that he said he had sent the bank, asking it to stop the standing order payment for his rent for one month only. The bank insisted that it had no record of receiving the letters, and it said it considered it unlikely that both letters would have gone astray.
We asked Mr V why he had decided to pay the rent in a different way for just one month - and how he had paid it. He was unwilling to comment. So we then asked him whether he had tried and failed to get the overpayment back from his landlord. He told us that his landlord was entirely willing to refund the money as soon as he received a formal recall request through his bank account.
We offered to speak to Mr V's landlord to explain that the bank was not in a position to recall the payment in this way. However, Mr V would not consent to our doing this.
Overall, we did not find Mr V's evidence convincing and we did not uphold his complaint. In general, if a bank has caused a problem, the consumer is entitled to expect the bank to put it right. We noted that the bank had confused matters somewhat by making a provisional credit to Mr V's account - perhaps forgetting the difference between a standing order and a direct debit.
However, we considered the amount it had written off when it closed Mr V's account (about £100) to be more than sufficient compensation for any inconvenience it had caused him.
Mr and Mrs B noticed that, over time, duplicate direct debit mandates had been created for monthly payments to their water utilities company and for Mrs B's gym membership. Having established which direct debits were the active ones, they instructed their bank to cancel the old, inactive ones.
Unfortunately, the bank cancelled both the inactive and the active direct debits - and then wrote to the mandate holders to tell them the mandates were cancelled. The first the couple knew of this was when Mrs B next visited her gym. As she went to sign in at the reception desk, she was taken to one side and told that her bank had cancelled the direct debit for her monthly membership fee.
The following day, the couple received a standard letter from their water utilities company, asking them to complete a new direct debit mandate. Mr and Mrs B then phoned their bank. It apologised for its mistake and said it would reinstate the active direct debits. It also offered the couple £50 to compensate them for the inconvenience they had been caused.
However, the couple said this offer was insufficient. They complained that the bank's actions had resulted in Mrs B feeling 'humiliated' at her gym. And they said that the bank's letters to the water company and the gym represented a 'breach of confidentiality'. They therefore wanted £500 compensation.
They said the bank should also provide an assurance that it would change its procedures, so that cancellation of a direct debit did not result in any letter being sent to the holder of the direct debit mandate.
The bank offered to write to the water company and the gym to explain that the problem had been down to an error on its part. However, it was not prepared to increase its offer of compensation or to change its standard procedures in relation to the cancellation of direct debits. Mr and Mrs B then brought their complaint to us.
complaint not upheld
The fact that the bank had made a mistake was not in dispute - and we agreed with the couple that the mistake had caused them some inconvenience. However, we were not persuaded that Mrs B had been 'humiliated' at her gym. By her own account, she had simply been taken to one side by the receptionist and asked to check with her bank, as it appeared that there had been an error with her direct debit. We noted that Mrs B was a well-established member of the gym - and that the gym had been perfectly happy for her to continue using its facilities as normal while the problem was sorted out. We also noted that the gym was part of a large chain and would have been accustomed to dealing with occasional administrative glitches with members' direct debits.
We accepted that Mr and Mrs B were annoyed to find that the bank had sent out a standard letter informing the water utilities company and the gym that the direct debits had been cancelled. However, we did not agree that the letters amounted to any breach of confidentiality. These two companies were, after all, the holders of the direct debit mandates.
The bank had taken immediate steps to apologise and put things right. We therefore considered that the modest payment it had offered Mr and Mrs B was proportionate and fair. We did not uphold the complaint.
Mr E switched his personal account to a new bank (bank B). His old bank promptly sent bank B the details of all his direct debits and standing orders, as it was required to do at that time under the Banking Code.
Unfortunately, bank B did not administer the direct debit and standing order mandates correctly. As a result, Mr E's mortgage and credit card accounts (which were also held at bank B) went unpaid, as did his utilities accounts and other monthly commitments.
Mr E went abroad on an extended business trip very shortly after switching his account. It was therefore only after he returned home a couple of months later that he realised there was a problem. He had been sent a number of letters about various missing payments. And when he checked his most recent bank statements, he saw that he had incurred charges on his current account from the unpaid direct debits and standing orders.
As soon as he contacted his bank, it apologised for the mistake and assured him it would put matters right immediately. However, it was nearly two months before the bank had brought the payments properly up to date, amended the adverse credit reference information on his mortgage and credit card accounts, and refunded the charges on his current account. In the meantime, Mr E had to make a number of phone calls and write several letters to try and get things sorted out.
In response to Mr E's subsequent complaint, bank B offered him £250 compensation for the upset and inconvenience it had caused him. Mr E did not think this was enough.
He told the bank that its errors had led directly to his losing the opportunity to buy a holiday home abroad. This was because the errors had resulted in adverse credit reference information that stopped him getting the finance he needed to buy the property. He asked the bank for an additional £5,000 to compensate him for fees and other expenses associated with the failed property purchase. When the bank refused to increase its initial offer of compensation, Mr E brought the dispute to us.
complaint upheld in part
Bank B maintained that on top of its offer of £250 compensation, it had already paid Mr E 'extra compensation', in the form of a refund of all the charges incurred on his account as a result of the problems with his regular payments.
We pointed out that Mr E would never have incurred these charges if the bank had processed the standing orders and direct debits correctly. So by refunding the charges, the bank was not providing any form of compensation - it was simply putting the account back to where it should have been.
We accepted that Mr E had been caused a considerable amount of upset and inconvenience. However, we were not convinced by his claim that the bank should compensate him for the failure of his property purchase abroad. Several significant difficulties, quite unconnected with anything the bank had done or failed to do, appeared to have prevented his buying the property. And he was unable to provide any evidence to support his claim that it was the adverse credit reference information - registered as a result of the bank's mistakes - that had prevented him from obtaining the finance he needed.
We did not uphold Mr E's claim for compensation of £5,000 for the failed property purchase. However, we told the bank that it should pay him more than it had offered him so far, to compensate him for the problems with his regular payments. The bank subsequently offered to pay Mr E £400. We told him we considered this, together with a full refund of all the bank charges he had incurred, to be a fair settlement.
Miss D paid her membership fees for a sports club by means of a monthly direct debit on her current account. She received a letter from the club, saying that in eight weeks' time it would be closing for around three months, while extensive repair and renovation work was carried out. Members were offered two options for the period when the club was closed. They could suspend their membership for three months, or transfer it temporarily to another club some distance away.
The sports club asked members to respond by email, stating their preference. The club would then make all the necessary arrangements.
Miss D emailed the club to say she wanted to suspend her membership. She thought no more about it until a few weeks after the club's temporary closure, when she received a bank statement. This showed the direct debit for her club membership was still being paid.
Unable to contact any of the sports club staff by phone, Miss D rang her bank for advice. It told her she should pursue the sports club for a refund - and it suggested she should put her request to the club in writing, and keep a copy for future reference.
Miss D did that, but had no reply. And the following month a further club membership payment was taken under the direct debit. Miss D then contacted her bank again. She said a colleague had told her about the Direct Debit Guarantee - under which the customer is guaranteed a full and immediate refund by the bank if there is an error with a direct debit. The bank told her the Direct Debit Guarantee only applied if the error was made by the bank itself. Miss D said this did not tally with what her colleague had told her.
After some discussion, the bank conceded that the guarantee did cover mistakes made by the beneficiary of the payment, as well as those made by the bank. And it agreed to ensure that no further payments were made under the direct debit, for the time being. However, it told her it could not arrange a refund, so she would have to contact the club herself and ask if it was prepared to pay back the money she thought she was owed. Miss D then brought her complaint to us.
Miss D was able to produce a copy of the letter she had received from the sports club, together with a copy of her email confirming that she wanted to suspend her membership. She had responded promptly and to the correct email address. So we were satisfied that the club had made a mistake in continuing to take payments from her bank account.
Given these circumstances, Miss D was entitled to an immediate refund from her bank. The bank was unable to explain why its staff appeared not to have a proper understanding of the Direct Debit Guarantee. We said its response to Miss D's enquiries had been incorrect and unhelpful, and had added to the inconvenience she had been caused. So we told the bank that in addition to refunding the two payments taken in error, it should pay Miss D £100 compensation for its poor handling of the matter.
For printed copies of this or any of our publications, phone 020 7964 0092 or email publications.
ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.
The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.