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ombudsman news

issue 106

November/December 2012

regular payments

Standing orders and direct debits are two of the most familiar ways of transferring money or making a payment. In most cases, payments and transfers go through promptly and without any problems. But sometimes things go wrong. And if a consumer cannot sort a problem out directly with a financial business, we can consider the complaint.

Although standing orders and direct debits might seem similar, they do work differently. We sometimes find that problems are caused by a misunderstanding - on the part of the consumer or the financial business - about how these payment arrangements actually work.

A direct debit is set up by a consumer with the recipient of the direct debit payments. The recipient then notifies the consumer's current account provider about the direct debit mandate - and applies for the payments when they are due. The recipient can make changes to the payments that it collects under the arrangement - but consumers who decide to make payments by direct debit are protected by the Direct Debit Guarantee. This requires payment recipients to tell a consumer if there are changes to their direct debit, and banks or building societies to refund the consumer if a payment is made in error.

A standing order is set up by the consumer with their current account provider - and any changes to the standing order are made by the consumer direct with that current account provider. The current account provider sends the regular payments to the recipient named by the consumer - until either the consumer tells it to stop or the standing order instruction runs out.

Continuous payment authorities are different again. They can only be set up on plastic cards - that is, credit or debit cards. Consumers often use continuous payment authorities to pay ongoing subscription charges - for example, for magazine subscriptions or gym membership. The consumer gives their authority to the supplier that they want to pay - and the supplier then takes the regular payments direct from the consumer's bank. In the cases we see, some consumers have run into problems when they decided to stop the ongoing payments. Often, they have not been able to make the supplier stop taking the payments - and they can't get their bank to stop things at their end, either. Since November 2009, new rules have meant that consumers have also been able to cancel continuous payment authorities with their own bank.

Our online technical resource contains more information about our approach to cases involving these different payment methods. The case studies that follow illustrate some of the more common problems that we see, including:

  • direct debit payments not being paid
  • banks failing to cancel a direct debit
  • confusion about how banks process direct debits and standing orders - and the implications for consumers
  • problems cancelling continuous payment authorities

issue 106 index of case studies

  • 106/1 - complaint about unpaid direct debits causing damage to the consumer's reputation
  • 106/2 - complaint about a bank allowing direct debits without holding any "signed authority"
  • 106/3 - complaint about a bank failing to cancel a direct debit
  • 106/4 - complaint about a bank processing a standing order in error - which led to recipient receiving money twice
  • 106/5 - complaint from consumers with power of attorney about bank making payments under a continuous payment authority
  • 106/6 - complaint about a bank not paying a direct debit

106/1
complaint about unpaid direct debits causing damage to the consumer's reputation

Mr T went into the bank in the afternoon and paid some money into his business account to cover two direct debits that were due to come out of his account that day. However, although Mr T's account was in credit, there was not enough money to cover either of the direct debits - and they were "returned" as unpaid on the same day.

Mr T complained to his bank. He said that he had gone into the bank specifically to pay in money to cover the payments - and that his reputation with two of his suppliers had been damaged. He pointed out that his statement showed the money going into his account on the same day as the direct debits were due to be come out.

The bank explained to Mr T that to make sure the money was available to cover the payments, he would have needed to pay it into his account by the end of the working day before the direct debts were due to go out. The bank rejected Mr T's complaint, and he asked us to investigate.

complaint not upheld
We reviewed the terms and conditions of Mr T's business bank account. We found they explained clearly that money to cover a direct debit would need to be in the account the day before the payment was due to come out. We also noted that Mr T had found himself in a similar situation before - and that the bank had explained the terms and conditions to him then.

We noted that the bank had processed the direct debits early in the morning - and well before Mr T had paid in the money he had intended to cover them. We explained to Mr T that banks usually do process payments early - which is why the money would have needed to be in his account the previous day.

In these circumstances, we did not uphold the complaint.

106/2
complaint about a bank allowing direct debits without holding any "signed authority"

Mr M had been paying his monthly mobile phone bill by direct debit. Shortly after he cancelled his contract - and paid the outstanding balance on his account - he noticed that his mobile phone provider had taken some money from his bank account by direct debit. He contacted them to ask why they had taken the payment - and reminded them that he didn't owe them any money. The mobile phone provider acknowledged its mistake and refunded the money to his account.

Although his money had been refunded, Mr M was annoyed about what had happened. So he wrote to his bank to ask why the direct debit had gone through without his permission. The bank wrote back to Mr M. It explained that when he had taken out the contract with the mobile phone provider, a direct debit had been set up under the Automated Direct Debit Instruction Service - usually shortened to AUDDIS. This scheme allows direct debits to be set up electronically - without the provider of goods or services needing to send paper instructions to the bank. But Mr M was unhappy with this explanation, and decided to refer his complaint to us.

complaint not upheld
When we looked into Mr M's case, we concluded that the bank had set up the direct debit correctly. It had used the information supplied by the mobile phone provider through "AUDDIS". We explained this to Mr M.

We also explained to Mr M that under the Direct Debit Guarantee, a bank must refund any payments taken in error. But in this case, Mr M's mobile phone provider had already put things right - so we did not ask his bank to do anything else.

106/3
complaint about a bank failing to cancel a direct debit

Mr E had a number of direct debits set up on his bank account. He was looking to reduce his outgoings, so he printed off a list of his regular payments to look for things he could manage without. He decided that going to the gym twice a week was a luxury he could no longer afford. So he wrote to the gym to cancel his membership - and asked his bank to cancel the direct debit.

However, the bank did not cancel the direct debit to the gym and the payments continued for a few months - until Mr E noticed that they were still coming out of his account. When he complained to his bank, it apologised for the mistake and offered him £50 for the inconvenience it had caused.

Mr E was not satisfied with this response - and asked the bank to refund the payments it had made to his gym in error. The bank refused, saying that Mr E should have noticed that the payments were still being made - and that he had "continued to benefit" from his gym membership.

Mr E was still unhappy, so he decided to refer the matter to us.

complaint upheld
We weighed up both sides of the argument. We did not think it was reasonable for the bank to say that Mr E had "benefited" from his continued gym membership - not least because he had cancelled it, so would have had no reason to have gone to the gym. And we did not agree with the bank that Mr E should have noticed that the payments had continued to be made.

We also reminded the bank of its responsibilities under the Direct Debit Guarantee scheme - which covers exactly this sort of situation. We told the bank to refund to Mr E the payments it had made since he had cancelled the direct debit. We also told the bank to pay him £150 for the inconvenience it had caused him.

106/4
complaint about a bank processing a standing order in error - which led to recipient receiving money twice

Mrs N decided to switch her current account to a different bank. She used her new bank's account switching service to transfer her direct debits and standing orders across to her new account. These included a standing order to pay rent to her landlord each month. The first payment was due to go out on the first day of the following month.

On the day the payment was due to go out, there wasn't enough money in Mrs N's account to cover it. Mrs N decided to pay her landlord in cash for that month's rent. However, a few days later, she paid more money into her account - and her bank processed the rent standing order.

When she realised what had happened, Mrs N complained to her bank. She said that it should not have made the payment later than the date she had asked it to - and that she was now out of pocket. The bank rejected her complaint. It pointed out that her standing order instruction had always said that if there was not enough money in her account to make a payment, the bank would make the payment as soon as enough money became available. Mrs N was not satisfied with this response - and referred the matter to us.

complaint not upheld
When we looked at Mrs N's standing order instruction, we saw that it did explain clearly what would happen if there was not enough money in her account on the day the standing order payment was due. So we were satisfied that the bank had not made a mistake when it paid the standing order - and that it could not reasonably have realised that Mrs N had decided to make a one-off payment for that month.

So although Mrs N's landlord had been paid twice that month, we did not think it was reasonable to hold the bank responsible for it. We suggested to Mrs N that she speak to her landlord directly about getting the overpayment refunded.

106/5
complaint from consumers with power of attorney about bank making payments under a continuous payment authority

Mr C and Ms A's father was becoming less confident in managing his finances. So he decided to ask his son and daughter, Mr C and Ms A, to look after his financial affairs - and made a power of attorney. Mr C and Ms A wrote to their father's bank to tell it that they would be managing their father's finances - and instructed it to cancel all the direct debits set up on his account.

A year later, Mr C and Ms A were surprised to find that some regular payments had been made from their father's account. Ms A phoned the bank to ask what had happened, and was told that the payments were to do with a satellite television subscription.

Mr C and Ms A complained to the bank. They explained that they had asked for all their father's direct debits to be cancelled - and that it had not happened. The bank responded to their letter. It said that the payments in question were not direct debits, but a "continuous payment authority" - and that it had been obliged to make the payments. It suggested that Mr C and Ms A contact the satellite television provider to get a refund.

Mr C and Ms A were unhappy with the bank's response - and they asked us to look into the situation.

We explained to Mr C and Ms A that a "continuous payment authority" (often called a CPA) is not the same thing as a direct debit. A continuous payment authority is a payment arrangement that a consumer sets up on their plastic card. This type of payment arrangement is often used to enable regular monthly payments - for example, to pay for a gym membership or internet subscription. But it can also be used to enable a supplier to take variable payments at any time during the month. The consumer gives their authority to the supplier that they want to pay - and the supplier then takes the payments direct from the consumer's bank.

We discussed Mr C and Ms A's situation with their bank. We pointed out that when Mr C and Ms A had taken on their father's financial affairs, they had written to the bank to explain the situation. Although they had not specifically mentioned the satellite TV payment, we felt the bank should have known enough about their circumstances to have clarified with them whether they had wanted to cancel all the payments coming out of their father's account - or just the direct debits. After we spoke to the bank, it got in touch with Mr C and Ms A and offered to put things right.

106/6
complaint about a bank not paying a direct debit

Mr N took out a store card with a department store. Rather than worry about remembering to pay off the balance each month, he set up a direct debit to pay off the monthly balance in full. Two months later, the store wrote to Mr N to tell him that the direct debit had not been paid. So Mr N got in touch with his bank to find out what was happening.

Mr N's bank looked into it, and wrote to him explaining that the store's instruction for the direct debit had included the wrong bank account number for him. This meant the bank had not been able to take the payment from Mr N's account. Mr N did not feel that this was good enough. He felt the bank should have written to the department store to explain the situation. When the bank rejected his complaint, Mr N decided to refer the matter to us.

complaint not upheld
When we investigated what had happened, we found that the store had submitted the wrong account number to the bank. So the bank had been rejecting the payment because it could not find the account it was supposed to come out of.

We explained to Mr N how the automated direct debit process works - and why his bank would not have been able to identify the account the direct debit was actually intended for.

We were satisfied that the bank had returned the direct debit request to the store - and had added the explanation "no account". We thought this should have alerted the store card issuer to a problem with the account number - and that they should have dealt with the problem from there. We suggested to Mr N that he take our letter to the department store to see what solutions they could come up with.