Suppose I buy services from BigTelco and agree to pay by DD. I run up a bill of £100. They take £100 by DD, simple.
How it works..
- I agree to pay by DD and provide an instruction to my bank allowing BigTelco to request them to send money from my account to BigTelco.
- The bank, in return, agree to provide me with the Direct Debut Guarantee. It is pretty simple - if a mistake is made I am entitled to an immediate refund.
- BigTelco tell me they are going to take £100, let's say the pick 10th of month
- They tell my bank to pay them, but make a mistake, saying 9th, and the money goes on the 9th
- For sake of simplicity let's say I have the money, the account does not even pay interest, I don't even notice the error, no inconvenience or costs at all.
At this point I have paid my £100, simple. Everyone is happy.
Then, later, I get my bank statement and realise it went on 9th not 10th. So I tell my bank. For the sake of argument, let's assume bank not being arses, and in a case like this I could literally show them the advance notice saying 10th and the bank statement saying 9th, so no question, no argument, no doubt.
- My bank give me £100 immediate refund.
- The bank, having now lost out, make an insurance (Direct Debit Indemnity Claim) from BigTelco
- BigTelco pay out on the claim sending £100 to my bank.
[update] It is worth explaining a bit about this complicated system. Obviously the scheme could have been that the originator (BigTelco) had to give an immediate refund if a mistake is made. Had that been the case it would be clear the money was sent back by them, but one assumes people did not trust the administration of the guarantee to be in the hands of the party that made the mistake in the first place, and so the guarantee is made by the banks and not the originator, hence this complex process of an indemnity (insurance) to the banks.
Now, at this point I am £100 better off, and BigTelco is £100 worse off.
Now, at this point I am £100 better off, and BigTelco is £100 worse off.
The question, and the whole point of the blog post, is do I still owe BigTelco £100?
I can think of three reasons why...
1. BigTelco were forced to send me £100, so obviously I do.
[update] AKA, the payment was "reversed" so obviously I do.
This is probably the most obvious and what most people and companies would assume. Obviously if I only owed £100 but they took £110 and I got a £110 refund, I would in fact only owe the initial £100 not £110 that was a mistake, but clearly, having been forced to send money back to me, I now owe whatever balance is now due after adding that refund. Obviously there could be something in BigTelco's T&Cs to cover this case, but that does not seem to be the case generally as everyone assumes this scenario is BigTelco returning the money to the customer.
I think not!
[update] This is not a case of the payment being reversed (see above for the complicated way this happens).
BigTelco are £100 worse off, but not because they were forced to send me £100. They sent my bankers £100 and that was because they agreed to insure my bankers. The £100 was not "for me" it was for my bankers that have lost out to the tune of £100 and made that insurance claim from BigTelco.
I am £100 better off, but not because BigTelco were forced to send me £100, no. The £100 was from my bankers not from BigTelco, and was because my bankers agreed a guarantee with me.
To illustrate, consider, after taking the £100, BigTelco went bust and by the time I told my bank of the mistake they no longer existed. In that case my bankers still have a guarantee agreement with me and still have to pay me the £100. In that case my bankers are £100 worse off and have nobody to make an insurance claim from. I get to keep my £100 in that case, clearly. This demonstrates my £100 did not come from BigTelco.
2. Insurance companies can pursue losses as if the insured
Another principle is that if you pay out on insurance, you can then pursue someone for damages. E.g. if you were to break my phone, I could pursue you for damages. If, however, I claim on my insurance, then my insurers can pursue you for damages.
So BigTelco insured the bank, but they can pursue me for the £100 they had to pay out.
I think not!
The insured risk was "a mistake in the Direct Debit payment". The mistake was made by BigTelco, not me. So if they have anyone to pursue, it is themselves. I am not the cause of the insured event.
3. Unjust enrichment.
There is a principle of unjust enrichment which may apply, and I am not a lawyer.
However, I am £100 better off, and BigTelco are £100 worse off, I am "unjustly enriched" and so should pay them the £100.
I think not!
Again, this was not £100 from BigTelco. If I am "unjustly enriched" I should pay the money back to the person that paid it to me, my bankers. However, I do not think this is "unjust", this is money from a guarantee the bank offered me and on which I validly claimed.
Consider Pizza Hut. If they take more than 40 minutes to deliver my pizza I get £10. This is not to cover losses or damages in any way - I don't really have any losses for a pizza a few minutes late. It is a guarantee they offer. It would not matter if it was £10 or £1000 they pay, if they agree to pay it if the guaranteed event does not happen, then I justly receiving that payment.
I don't see how my bankers offer of a guarantee is any different. In this case they agreed to refund me if a mistake is made, and they did what they agreed when a mistake was made. My gain is justly from the guarantee the bank offered me.
Also, what of the example above where BigTelco no longer exists. Surely my getting a refund would be 100% just in such case, even though it is my bankers and not BigTelco that have lost out.
I am not a lawyer
One thing, obviously, is a judge is going to do the whole "walks like a duck" thing, and clearly say that the money came bank from BigTelco to me in that case, and so I still owe it. But really, that is not how it works and not what happened. I wonder if there has been any case law on this.
Imagine the chaos if there were - every clawed back DD ever would suddenly be something you could keep. People would be suing suppliers like mad if there was a case the way I think this should work.
On that bases, I must be wrong, surely. But... think of PPI, that was rock solid logic until the day it was not. This could be another PPI fiasco if it ever happened!
Just a though :-)
The point is, I think, that the bank refunded your £100 because it was taken on the 9th rather than the 10th and big Telco paid the bank back for the same reason.
ReplyDeleteYou are now no better off but big Telco is down £100.
However, presumably big Telco have provided you with goods or services to the value of £100 so you are still obliged to pay them for these.
At this point big Telco either just invoice you for what you owe, or they add it on to the next direct debit (hopefully on the 10th...)
Your argument is covered in point 1, and is basically that BigTellco have paid me back £100. As I explain, they have not done so. They were paid £100 by me by direct debit. I have received £100 from my bank, and *not* from BigTelco. BigTelco have paid out £100 on an insurance they gave my bank, they have not paid £100 to me. So nothing changes the fact I have already paid BigTelco the £100 due in the first place. See my point. If BigTelco paid someone else on some insurance, not my bank, would you think I owe them? I hope that makes sense.
DeleteI suspect the devil will be in the detail of the agreement between your bank - intermediaries - BigTelco.
ReplyDeleteYour bank is just responsible for processing the refund and giving it to you - it isn't necessarily correct to say that your bank have ever paid that money from their own pocket.
I think it is pretty clear that they do have to pay it from their own pocket so to speak, else there would be no need for the process of the bank making an "indemnity claim" from the originator. We see that side as a DD originator, and we had to sign a pretty open ended indemnity to all banks. The process for the bank getting money after giving a refund is an indemnity claim which only makes sense if the bank first have a loss (i.e. refunding the DD). Hope that makes sense. Yes, devil will be in detail.
DeleteAs an originator what would you do if a customer legitimately clawed back a direct debit payment?
DeleteAh just seen you have it in your T&Cs already!
DeleteFirst off, we obviously try very hard to never make a mistake in collecting a payment, and such claw backs are therefore very rare. I think like one a year and not sure we have ever had a valid one where we have actually make a mistake. However, we do (unusually) have it in the agreed terms that when a customer claims a refund from their bank we consider the payment “undone”, and hence any balance is then again due. Of course if we collected money not due then that undoing of the payment would not leave a new payment due.
DeleteAlso, we have a system so that if a subsequent credit means a DD needs refunding or partly refunding then we automatically send the balance back, with an email explaining we are doing that. That would not be a “mistake” in terms of collecting payments but still we ensure we do it right and send the refund.
DeleteYou've got it wrong. If Pizza Hut are late, you get a 'prize' in addition to the pizza, and both are yours to keep. However, the DD Guarantee will reverse the transaction ONLY (i) if BigTelco collect an amount that's not the same as they notified OR (ii) they collected it on the wrong date. It's like winding a film back and it puts everyone back to where they were: you haven't paid BigTelco BUT they are still entitled to bill you £100 after giving due notice once again. The refund should be immediate because the bank only has to establish whether BigTelco took the correct amount on the correct date, and that's easy. Note also that the DD Guarantee states that "If you receive a refund you are not entitled to, you must pay it back when the organisation asks you to."
ReplyDeleteFor most consumers, the real problem with DDs is the one you haven't mentioned, that its scope of the so-called Guarantee is very limited. So if Big Telecom say they will collect £4,880 for a 10-hour call to Miss Whiplash at Service Charge SC091 rates but you never made the call, there's nothing that you can do to stop or reverse the DD as long as they collect exactly that amount on the specified date. You're stuffed because the DD guarantee can't be used to resolve contractual disputes, your bank account can be raided.
However, if you just sent BigTelco a cheque each month you could just tell them what they could do with their silly bill !
This is point 1 in my blog, you are treating the DD guarantee as a "reversal of the payment" which it is not. That is my point. My example of what if BigTelco no longer existed shows that. It is a "guarantee" in just the same way as pizza hut make a guarantee. They are saying this won't happen, but if it does here is a "prize", a pay out under the guarantee. That is my point. Yes, the guaranteed event ends up specific types of mistake, and yes, there is even a "you ave to repay if you were not entitled to the refund", but if you are entitled, as in a mistake was made, it is a guarantee the the *bank*. In above example the guarantee is clear, as a mistake was made, that you *are* entitled to the refund form the *bank*.
DeleteYour example above that BigTelco can just raid your bank is incorrect.
DeleteIf you get said large bill, you simply cancel the direct debit removing the permission for BigTelco to charge your account and the Guarantee wont come into it.
Quite - you must get advance notice of the collection anyway, and can cancel the DD when you get that if you need to. If you don't get the advance notice, you can claim on the guarantee.
DeleteI think this is a terminological confusion. You are treating the word "indemnity" as a synonym for "insurance".
ReplyDeleteIn fact in this context it is a synonym for "guarantee".
The indemnity that exists between the merchant and the bank is not an insurance policy, it's just a guarantee that the merchant will return the money back to the bank if it turns out it was given to the merchant by the bank in error.
The bank is merely an intermediary in the transaction between the merchant and the customer, and to characterise the flow of money from merchant to bank (in the case of an indemnity) as being different in nature to the flow of money from the bank to the merchant (in the case of a normal payment) is nonsensical.
In the first case the merchant applies a receipt to a customer ledger in their accounts, and in the latter case they apply a repayment in that same ledger, with the result that if both transactions occur they cancel each other out on that customer ledger.
After the merchant has fulfilled their indemnity obligation by refunding the bank the customer clearly owes a debt to the merchant.
I believe it is a true indemnity, having had to sign one as an originator, and covers consequential losses and a lot more than simple ensuring the payment is sent back.
DeleteThe bank may be an intermediary in the original transaction but the DD guarantee has been set up very differently to simply being a reversal of that payment. The bank guarantee a refund to the customer, they lose out, then they claim because they have lost out from the originator. This is not the same as the "originator returning the money to the customer (via the bank)". It is not set up that way at all.
I do appreciate that "reversing the payment" or "returning the payment" is how people assume it works or see it working as the overall effect, and indeed that is in practice how people see it - my whole point is that it is legally set up as two separate distinct steps, none of which actually mean the customer has actually "undone" their original payment to the originator.
Hmm. Well I've not ever been an originator of DD so haven't read real paperwork, but it would certainly be surprising if the terms weren't structured as e.g.
Deletea) if you cock up in the following ways then the bank will reclaim the customer's money from you (in practice I assume they simply deduct it from the money they regularly pay you in respect of other ongoing DD collections)
b) if a load of other arcane issues occur e.g. consequential loss etc etc then blah blah blah ten pages of silly legalese that almost never gets invoked.
Item (a) feels no different conceptually than a merchant chargeback on a credit card transaction. The fact that the chargeback is invoked as a result of a lengthy legal document signed between the retailer and the acquiring bank doesn't change the fact that in the mainstream case it's just a means of giving effect to a refund of the customer's money.
Google didn't prove very helpful (I didn't go as far as to attempt to read whatever primary legislation actually brought this into existence!) but it did unearth https://gocardless.com/direct-debit/guarantee/. Is your view that this is materially inaccurate (it effectively says that the DD Guarantee as presented to the consumer and the DD Indemnity are two sides of the same coin, and that in the case of your Barclays debacle in fact they might have been correct that your claim under the guarantee was an indemnity claim since those things are actually synonyms.
The DDIC is a separate transaction, not "just deducted" :-)
DeleteBut I appreciate it is like a "charge back", but I believe that is legally framed differently. E.g. if bank cannot charge back as merchant gone bust, then you don't get your money. The DD is done separately as a distinct guarantee made by the bank to its customer. It is odd, I agree.
In practice they are "two sides of the same coin", obviously. And the DDIC is because of the refund, it is to cover the banks loss in having make a refund. I agree. What I cannot quite see if that it legally means you have "un-paid" the original payment. As a consumer you have "claimed your reward on a guarantee" like the pizza hut example. As an originator you have "paid our on an insurance policy to a *bank*"... As I say, in practice the dots are joined, but I am not convinced that legally they have to be without (e.g. in our terms) something explicitly making it so in contract between originator and consumer.
Just to add, some other cases to consider. If the bank claimed some admin fee as consequential losses under the DDIC (not sure they can in practice, but assume the legal means, the indemnity allowed this), and so the DDIC was for £105. Would the customer now owe the originator £105, or just the original £100. If the latter, then how is only part of this insurance policy something that makes the customer liable again, not all of it? That only makes sense if some sort of "unjust enrichment" logic applies.
DeleteOK, another cause, what if customer has losses, e.g. £5 of "damages" due to the error, and getting the £100 has really only "gained" £95 in real terms because of those damages. Do they still owe the original £100 now, or only £95? Or as I am proposing, £0? i.e. where the money from the guarantee is their compensation for the error.