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ombudsman news

issue 27

April 2003

banking - direct debit guarantee

Direct debits are now a major part of daily life, with many people using them each month to pay their household bills. The direct debit guarantee is a powerful safeguard for customers. So it's important that firms make sure their staff understand its provisions.

Unfortunately, many do not. Here are some of the things firms have told customers (incorrectly) when problems have arisen:

  • "We don't operate the direct debit guarantee."
  • "You'll have to contact the originating company for a refund."
  • "We need a month's notice to cancel a direct debit."
  • "The guarantee doesn't apply - because you haven't suffered a loss."

If you pay by standing order, it is up to your bank to send the payment. If you pay by direct debit, it is up to the payee's bank to call for the payment, but you will rightly look to your own bank/building society to ensure the smooth running of any direct debits. Mistakes and errors are covered by the direct debit guarantee.

The direct debit guarantee applies to all banks and building societies taking part in the direct debit scheme. It says that:

  • if there is a change in the amount to be paid or the payment date, the person receiving the payment (the originator) must notify the customer in advance.
  • if the originator or the bank/building society makes an error, the customer is guaranteed a full and immediate refund of the amount paid.
  • customers can cancel a direct debit at any time by writing to their bank or building society.

banking case studies - direct debit guarantee

bank pays out under direct debit that customer had cancelled

Mrs B enrolled her son at a fee-paying school and signed a direct debit form, authorising the school to claim the school fees direct from her current account. But Mrs B removed her son from the school only a few weeks after he had started there.

She cancelled the direct debit and made separate arrangements to pay the school what she considered to be due. However, this was less than the school thought it was owed. A couple of months later, the school claimed an extra term's fees under the direct debit, because it said that Mrs B had been required to give a term's notice. When Mrs B's bank paid the sum requested, even though she had cancelled the direct debit, Mrs B complained and asked the bank to pay the money back.

The bank argued that she was not entitled to have her money back. It said she had not suffered a loss as a result of its making the payment because she owed the school the money in any event.

complaint upheld
It was irrelevant whether Mrs B owed money to the school. What was relevant was that her bank had paid out under a direct debit that she had cancelled. So, under the direct debit guarantee, once Mrs B notified the bank of its error, it should have refunded the money straight away. It wasn't for the bank to decide whether or not Mrs B owed the money to the school.

bank pays out after direct debit cancelled - direct debit guarantee not applicable

Mr F set up a variable direct debit for payments to his stockbroker. He generally placed an order for shares around the middle of each month and the stockbroker collected the payment through the direct debit at the end of the month.

Eventually he decided to end this arrangement and cancelled the direct debit mandate. But the very next day, the stockbroker requested £50,000 via the direct debit and the bank paid. Several months after this, Mr F complained to the bank and claimed a refund of the money under the direct debit guarantee.

The bank refused, saying that to repay Mr F would result in his "unjust enrichment". This was because he already had the shares to which the payment related, even though their value had since gone down.

complaint rejected
In assessing this case, we looked at the terms of the direct debit guarantee. Customers can cancel a direct debit at any time by writing to their bank. Mr F had written to his bank and cancelled the direct debit the day before the payment was made.

So if the bank had paid the stockbroker under the direct debit, it must have been in error because he had cancelled the direct debit. And if the bank makes a payment in error the customer is entitled to a full and immediate refund.

But in this case we found that the stockbroker had Mr F's authority to debit his account independently of the direct debit. It was in the terms and conditions of his contract with the stockbroker that the costs of each deal would be taken from his nominated account. So that gave the bank authority to release money from his account to the stockbroker, whether or not this was done via a direct debit, and we did not uphold the complaint.

bank's failure to transfer direct debits correctly to new accounts - customer does not notice for ten years - complaint outside time limits

For some years, Mr and Mrs C had a joint bank account, out of which they paid a number of direct debits. But eventually they decided to set up their own separate accounts and they divided their direct debits between these two accounts.

Mrs C frequently shopped at a large department store for which she had a store card. The direct debit for this card should have been transferred to her new account but, in error, the bank transferred it to her husband's account.

Mr C remained unaware of this for ten years until, after falling out with the bank over another matter, he took a close look at the direct debits on his account. He then found that he had unwittingly been funding all his wife's spending at the store for the past ten years.

Mr and Mrs C both blamed the bank for the error and Mr C complained to the firm, saying that under the terms of the direct debit guarantee it was responsible. When the firm rejected the complaint, Mr C came to us.

complaint rejected
We were unable to deal with the complaint because it was outside our time limits. For us to consider a complaint, the event complained about must have happened within six years, or within three years from when the customer ought reasonably to have been aware that there was cause for complaint. In this instance, the bank's failure to transfer the direct debit correctly had happened more than six years ago.

But even if this had not been the case, we would not have upheld the complaint. The payments had been coming out of Mr C's account for many years and he received statements every month, so he had ample opportunity to spot the mistake and notify the bank. In the circumstances, we did not think it reasonable to require the firm to refund the payments as he had requested.

bank pays out after fraudulent direct debits set up - customer claims refund plus payment for consequential losses

When withdrawing money from his account via a cash machine, Mr M was very surprised to find he had become overdrawn. He checked his bank statement and found that two direct debits had been set up on his account without his knowledge.

The bank looked into this and found that a fraudster had somehow obtained Mr M's bank details and set up direct debits to repay a car loan and take out car insurance. The firms that were taking the payments for the loan and the insurance were both members of AUDDIS (Automated Direct Debit Instruction Service). This meant they could establish direct debit instructions without needing to send paper instructions to Mr M's bank.

In the past, a bank would always have received instructions to set up a direct debit in the form of a document signed by the customer. But increasingly, firms are carrying out these transactions electronically. This saves time and helps reduce costs but makes it less easy to spot a fraudulent instruction.

Although Mr M's account number and the bank's sort code were correct, the fraudster had given an incorrect account name. This should have alerted the firm that something was not quite right and it should have made further enquiries before proceeding.

The bank readily accepted that, in accordance with the direct debit guarantee, it should refund the direct debits incorrectly paid. But it refused to compensate Mr M for the additional losses he claimed to have suffered. He had a savings account with the firm, which fed his current account. He wanted to claim for loss of interest on the money that would have remained in his savings account if the firm had not paid out via the fraudulent direct debits.

He also said that since his earnings came from abroad, the firm's error meant he had to make extra transfers from his foreign bank account to keep his account with the firm in credit. The unfavourable exchange rate and the foreign bank's charges meant that these transfers were costly.

When the firm to refused to compensate Mr M for these additional losses, he came to us.

complaint settled
Mr M argued that the bank should cover these losses under the direct debit guarantee. He said its purpose was to protect account holders who had set up direct debits from mistakes in the way they were operated.

In this case, as Mr M had not authorised a direct debit, the direct debit guarantee was not strictly relevant. However, after we discussed the position with the firm, it offered Mr M a goodwill payment to cover his consequential losses.

sue slipman, chair of Financial Ombudsman Service

Sue Slipman, newly-appointed chair of the Financial Ombudsman Service, shares her first impressions of the ombudsman service.

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.