- Changes to direct debits
- ‘No questions asked’ refund
- Business to business scheme
The Single Euro Payment Area (SEPA) initiative will be implemented in Ireland from 1 February 2014. Businesses will already have received notifications from their banks about this deadline and the practical changes it will bring from a day-to-day banking perspective. However, many businesses may not be aware of the potential repercussions of the new pro-consumer practices that are being implemented under SEPA.One of the aspects of the SEPA changeover that will affect many businesses is the implementation of a new SEPA Core Direct Debit Scheme in place of the existing Irish direct debit scheme. Set out below are some key considerations for those businesses that receive payment by way of direct debit.
Customers’ Right to Refund
Under the SEPA Core Direct Debit Scheme, a customer who has paid for goods or services by direct debit will be entitled to seek refunds of amounts debited from their accounts on a ‘no questions asked’ basis up to eight weeks after the debit date. The right to refund is automatic and the customer will not have to show that they have any grounds for disputing the validity of the charge. The customer’s bank will then recover the debited sum from the business’s bank, which will, in turn, recover the sum from the business, leaving the business out of pocket.
It is important that businesses are aware of this new rule and its potential impact on their cash flow position. The right to a refund will apply even where the goods or services may already have been received by the customer. Given that there will have been a cost to the business in providing the goods or services, that cost coupled with the loss of expected income will have a negative impact on cash flow.
Of course, businesses may choose to protect themselves by seeking payment from customers by another means to avoid the refund risk but, given the convenience of direct debit payments for both customers and businesses, this is unlikely.
Businesses should review their debt-recovery processes to confirm that they have an effective system in place to recover any validly-debited amounts refunded to customers. The refund rule appears heavily pro-consumer, to the potential detriment of businesses, but is balanced to an extent by providing that payment of a ‘no questions asked’ refund to a customer will not prejudice the outcome of a dispute over payment between a customer and a business. This means that even though a direct debit payment may have been refunded to a customer, if the goods or services have been provided to the customer, the business can still attempt to collect the sum due by way of debt collection. Of course, if the customer is insolvent, the debt collection proceedings may be of no benefit.In addition to the ‘no questions asked’ refund, a refund may be made up to 13 months after the debit date in the event that the debit is deemed to have been an unauthorised transaction. Following a refund request from the customer, the customer’s bank must examine the request received and decide whether to accept or reject it. A business may dispute a refund claim by producing evidence.
Terms and Conditions
It may well be of benefit to a business to update its standard terms and conditions in light of the new rules. For example, under the Core Direct Debit Scheme rules, a pre-notification must be sent by a business to a direct debit customer at least 14 days before the due date for payment. However, the Core Direct Debit Scheme rules permit a business and customer to agree an alternative timeline for such a notification. Where it is not feasible for a business to adhere to this fourteen-day timeline for whatever reason, it may wish to amend its terms and conditions to provide for an alternative timeframe. The pre-notification may be sent as a standalone document or as part of other commercial documents, such as an invoice. A business could also benefit from making changes to its standard terms and conditions to make it less attractive for a customer to avail of the ‘no questions asked’ refund facility. Such changes could involve including provision for retention of title on goods sold and the introduction of interest for late payment arising out of a direct debit refund.
SEPA Business Service
The Core Direct Debit Scheme applies to all direct debit customers, whether an individual consumer or a business. SEPA also provides for a separate business-to-business scheme, called the B2B Scheme. One key difference between the Core Direct Debit Scheme and the B2B Scheme is that the ‘no questions asked’ refund is not a feature of the B2B Scheme. Unfortunately, the main banks in Ireland have not yet registered as participants for the B2B Scheme. However, a temporary solution has been introduced by the Irish Payment Services Organisation (IPSO) to avoid creditors being disadvantaged by low bank uptake in the B2B Scheme. The solution is referred to as the SEPA Business Service and operates within the Core Direct Debit Scheme.
The SEPA Business Service is optional and involves business debtors confirming that they are business customers and voluntarily waiving their right to the ‘no questions asked’ refund. In order to avail of the service, both the debtor’s bank and the creditor’s bank must be participating institutions. A list of participating institutions, which includes the main Irish banks, is available on the IPSO website.
Under the SEPA Business Service operating conditions, in the event that a ‘no questions asked’ refund is given to a debtor by the debtor’s bank in error, the debtor’s bank will be liable for that refunded payment and will have no recourse to the creditor.
How We Can Help
We can provide guidance on rights and obligations under SEPA from a legal perspective and assist businesses in reviewing and, where necessary, updating their terms and conditions in light of the fast approaching 1 February deadline.