Many of our clients are grappling with the challenges posed by the 1 February 2014 deadline for implementation of SEPA (Single Euro Payments Area). While much of the focus has been on the logistical, IT and technical challenges of preparing for SEPA, it is also important to consider the possible impact of the right to refund of direct debits under SEPA on your business.
Credit and cash flow risks arising from SEPA’s no-questions-asked right to refund of direct debits
Under SEPA’s core direct debit scheme, a direct debit payer has the right to request a refund from its bank of any direct debit within eight weeks from the date on which the direct debit was debited from the payer’s account. Within this eight week period a refund must be provided by the payer’s bank on a noquestions- asked basis. Even if the payer has received the benefit of goods or services to which the direct debit relates, it is entitled to a no-questions-asked refund of the direct debit from its bank during the eight week period. The payer’s bank will be entitled to be reimbursed by the payee’s bank. The payee would seek recovery from the payer directly. The exercise of the right to a noquestions- asked refund is without prejudice to the payee's obligations to the payer in respect of the debt.
his right to refund of a direct debit on a no-questions-asked basis creates additional credit risks and potential cash flow risks for businesses which rely heavily on direct debits for incoming payments. There is a risk that certain payers who are experiencing financial difficulties might exercise the right to a refund without substantive cause in order to delay or even avoid payments, possibly after receiving the benefit of goods or services from the payee. There is also a risk that a payer may become insolvent or enter liquidation following the exercise of the right to a refund making recovery even more problematic for the payee.
Under the core direct debit scheme the no-questions-asked right to a refund of direct debits is mandatory. The rules of the core direct debit scheme prohibit participating payment service providers from contracting out of this right. Also, participating payment service providers will have to ensure that new direct debit mandates refer explicitly to this right of refund.
In addition to the core direct debit scheme, SEPA includes a business-tobusiness direct debit scheme which does not include a no-questions-asked right to a refund. However, the business-to-business direct debit scheme is only available where payment service providers have opted into it and only in respect of their non-consumer customers. To date the main banks and credit unions in Ireland have joined only the core direct debit scheme and have not yet opted into the business-to-business direct debit scheme. Some of them may opt in at a later date, particularly given the importance of the issue to many of their business customers.
Managing these risks
- Does the no-questions-asked right to a refund apply where a customer pays in a form other than by direct debit?
No. It is important to note that the no-questions-asked right to refund onlyapplies to direct debits. For example it does not apply to electronic payments made by a specific credit transfer. Therefore, one way of mitigating the risks involved in the core direct debit scheme is to require customers to make payments in a form other than by direct debit. However, in practice, the disadvantages of this approach include:
- the preference of many customers for discharging regular payments by direct debit;
- the additional administrative burden and cost for a business in having to monitor and reconcile each individual payment by credit transfer or other form; and
- the possible increased risk of missed or late payments where no ongoing authorisation for periodic payments with a fluctuating amount (i.e. in the form of a direct debit mandate) is in place.
- Should you review your internal credit control systems to take account of the no-questions-asked right to refund of direct debits?
Yes. It will be important for direct debit payees to have in place effective systems for monitoring when their customers exercise this no-questions-asked right to a refund. Prompt monitoring will enable the payee to engage with the payer in a timely manner to find out if there is any substantive reason for the exercise of the right to a refund and, if not, to seek to recover payment. For payees which are regulated entities to which the Consumer Protection Code 2012 (the “Code”) applies, engagement with payers who fall within a category protected by the Code must be in accordance with the Code.
- Should you review your terms and conditions of business with customers to ensure you are protecting your business?
Yes. It is also important to ensure that your terms and conditions of business protect your business effectively as regards the exercise of the right to refund. This may necessitate a legal review of your terms and conditions, particularly in relation to the consequences of a customer exercising the right to a refund without substantive justification. Such consequences could for example include the accrual of interest or the triggering of termination rights. Where a business relies heavily on direct debit payments and it does not already require customers to provide a deposit that may be used to discharge missed payments, the introduction of a requirement for customer deposits might be considered where appropriate.
- Is there any proposal to limit the no-questions-asked right to refund of direct debits to safeguard against abuses?
Yes but any proposals are unlikely to become law for some time. In July 2013 the European Commission published its proposal for a revised Payment Services Directive which is intended to replace the existing Payment Services Directive adopted in 2007 and transposed into Irish law in 2009. This proposal acknowledges that exercise of an unconditional right of refund of a direct debit by a payer is not justified where the payee has already fulfilled the contract and the corresponding goods or services have been consumed. The proposal includes a carve-out from the right of refund of a direct debit on a noquestions- asked basis within eight weeks to cover this scenario. Under the proposal the payer’s bank could require the payee to demonstrate that it had already fulfilled the contract and that the corresponding goods or services had been consumed. However, at present this is only a European Commission proposal which would require agreement of the Council of Ministers and the European Parliament to be adopted as a Directive and it may be altered considerably before it is adopted. It would then need to be transposed into Irish law so it may be several years before any such proposal becomes binding in Irish law.
- Other rights relating to direct debits
While this briefing is focussed on the eight week no-questions-asked right to refund of a direct debit, a payer under the core direct debit scheme will have other rights which may impact on your business including:
- the right to request a refund of an unauthorised direct debit within thirteen months from the date on which it was debited from the payer’s account;
- the right to refuse or prohibit direct debits on the payer’s account;
- the right to limit the amount or periodicity of direct debits on the payer’s account; and
- the right to add payees to an approved list or a “black list” in respect of the payer’s account.