The Direct Debit Guarantee Scheme was set up to offer comfort and protection to customers making payments by direct debit. Under the Scheme all banks and building societies that accept instructions to pay direct debits provide a guarantee to their customers. This guarantee provides that if an error is made in the payment of a direct debit to an organisation you are entitled to a full and immediate refund of the amount paid from your bank or building society.
Under the scheme the paying bank is required to accept the word of their customer that an error has been made and refund him the monies paid over by direct debit. Under the rules which govern the scheme the paying bank is entitled to take monies paid under direct debit directly from the organisation where it paid the monies on behalf of its customer. The scheme makes no provision for the paying bank to use its discretion where it suspects a fraud has been perpetrated and leaves the door open for fraudsters to profit at the expense of the SME, banking and corporate sectors.
Fraudsters are now using this loophole to exploit organisations where they can get the biggest hit. Recent examples include:
- A paying bank was contacted by its customer claiming that they had cancelled their direct debit instruction to their mortgage provider. They requested repayment of all monies paid over by direct debit to their mortgage provider over a five year period. The paying bank immediately took the money from the mortgage providers account in readiness to pay over to their customers. Fortunately on this occasion the mortgage provider acted quickly to obtain a freezing injunction to stop the monies being paid over to the fraudsters.
- A mortgage provider was contacted by the Land Registry who explained that they were considering a claim made by the previous owner of a property that the property should be transferred back into their name as they had not sold the property to the mortgage providers customer. Investigations quickly showed that the signatures on the transfer documents did not match and a property hijack had probably taken place. The mortgage provider was subsequently contacted by the fraudsters requesting all payments made to them be repaid as they became aware the Land Registry were almost certainly going to transfer the property back to the previous owner. Under the scheme the paying bank would have had to make this refund.
Unfortunately there are many more examples of fraudsters abusing the Direct Debit Guarantee Scheme to perpetrate fraud. It is important to continue to provide protection under the scheme to give customers a guarantee that where a genuine error has been made a refund is made without delay. This must be balanced with the potential losses to business. The rules of the scheme need to be amended to provide the paying banks with discretion to delay payment in order for them to determine whether a payment is genuine if they suspect the claim is fraudulent.