SEPA - Time is Running Out

With the deadline for implementation of the Single Euro Payments Area (‘SEPA’) looming, many Irish businesses are still not SEPA compliant. Businesses which miss the deadline risk being unable to make and receive euro payments by direct debit and credit transfer from 1 February 2014. Given the potential damage to reputation, cash flow, customer relationships and supplier relationships non- compliance is not an option. William Fry is available to help your business comply with SEPA and minimise legal risks associated with it.

What is SEPA?

SEPA is an initiative to standardise euro electronic payments (credit transfers and direct debits) across 33 countries including Ireland and all EU member states.

What is the deadline?

SEPA comes into effect in Ireland on 1 February 2014. Businesses must be SEPA compliant by that date.

How prepared are Irish businesses?

Many businesses are not prepared. This is one of the biggest challenges for implementation of SEPA in Ireland. According to John Rice, SEPA programme manager at the Central Bank, “the challenge is particularly acute amongst small and medium sized businesses who originate direct debits”. Larger businesses are better prepared in comparison. Many businesses don’t realise that SEPA is relevant to them or are putting off preparing for it. They risk not being able to make or receive euro electronic payments from 1 February 2014.

What will happen if my business is not SEPA-compliant by 1 February 2014?

From 1 February 2014, banks in SEPA countries, including Ireland, will be unable to process euro electronic payment orders if they are not SEPA-compliant.

What are the main changes under SEPA?

The main changes include:

  • Account numbers will be replaced by IBANs (international bank account numbers)
  • National sort codes will be replaced by BICs (bank identifier codes)
  • Standard customer file format for euro electronic payments will change to ‘ISO 20022’ XML
  • Direct debit agreements and timelines will change and the direct debit originator will be responsible for retaining the direct debit mandate
  • There will be new rights for payers by direct debit

What are the new rights of payers by direct debit?

Under SEPA, payers by direct debit will have the right:

  • To instruct their bank to immediately refund any direct debit payment within 8 weeks from the date of payment on a no-questions-asked basis
  • To request a refund for any unauthorised direct debit within 13 months from the date it was taken from their account
  • To use their bank account to pay a direct debit in any SEPA country
  • To prohibit any direct debits on their bank account
  • To instruct their bank to refuse a specific direct debit on their bank account from an existing creditor
  • To specify who can and cannot collect direct debits from their bank account
  • To limit a direct debit being taken from their account to a certain amount and/or frequency

What is the new right to a no-questions-asked refund for payers by direct debit?

A direct debit payer will have the right to instruct its bank to refund any direct debit payment within 8 weeks of such payment on a no-questions-asked basis even if the payer has received the corresponding goods or services. The payer’s bank will be reimbursed by the payee’s bank and the payee would seek recovery from the payer directly. The exercise of this right will not remove the payer's obligation to the payee to pay any debt. This right creates additional credit risk and potential cash flow risk for businesses which collect payments from customers by direct debit. There is a risk that customers experiencing financial difficulties might exercise the right to delay or even avoid payments, possibly after receiving the benefit of goods or services. If such a customer becomes insolvent or enters into liquidation or other insolvency proceedings after exercising the right to a no- questions-asked right to a refund, this would make recovery even more problematic for the payee.

Is it possible for customers to waive the no-questions-asked right to refund?

Yes, but only for business customers of a business. Following intensive business lobbying, the SEPA Business Service was launched in October 2013 to enable businesses to seek legal agreement from their business customers who pay by direct debit to waive the right to a no-questions-asked refund.

If you are a business which collects payments from business customers by direct debit and you wish to avail of the SEPA Business Service, you should ask your bank to provide a standard debtor confirmation template. Participating banks, including the major Irish banks, will provide this one-page template which includes an irrevocable confirmation that:

  • The payer is not a consumer
  • The payer’s right to refund of authorised direct debit payments will be limited to existing rights and will not include any additional rights (e.g. the right to a no-questions-asked refund within 8 weeks) under SEPA or under any new terms of business issued by its bank

You will need to contact your business customers who pay by direct debit, seek confirmation that their banks also participate in the SEPA Business Service and ask them to complete and return the standard debtor confirmation template. You must retain the completed confirmation as it may be required as proof that your business customer has waived the right to a no-questions-asked refund of direct debit payments.

Your bank should also provide you with a new creditor ID to show that you are participating in the SEPA Business Service and you must use this for all SEPA Business Service file submissions.

You must also prefix the creditor name field with “B8S” on the SEPA DD XML file in respect of each direct debit transaction under the SEPA Business Service.

Even if you have already migrated to SEPA and you are SEPA compliant, you will need to contact your bank to find out what additional action you must take to avail of SEPA Business Service as it was only launched in October 2013.

If a business customer does not agree to waive its right to a no-questions-asked refund or if a consumer customer pays by direct debit what can I do to protect my business from misuse of this right?

The no-questions-asked right to refund only applies to direct debits. If you require customers to pay by another method they will not have a no-questions-asked right to a refund.

If you continue collecting payments by direct debit, you should closely monitor when customers exercise the right to a refund and engage with the customer quickly. For payees which are regulated entities to which the Consumer Protection Code 2012 (‘CPC’) applies, engagement with customers who fall within a category protected by the CPC must be in accordance with the CPC.

You should ensure that your terms and conditions enable you to charge interest and take steps to terminate the contract where a direct debit payment is cancelled without cause.

You might consider requiring customer deposits 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. Current proposals for a revised Payment Services Directive acknowledge that exercise of an unconditional right to refund of a direct debit 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 no-questions-asked right to refund to cover this scenario. Under the current 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 remains a proposal and may be altered considerably before it is adopted as a new EU directive. It would then have to be brought into Irish law. This process may take some years.

What do businesses need to do now to prepare for SEPA?

Time is running out. If you have not already done so you need to:

  • Contact your bank now to find out how to prepare for SEPA and to avail of the SEPA Business Service
  • Contact a software provider approved by your bank if you need an upgrade of payment systems
  • Make sure your systems are SEPA compliant by 1 February 2014 (e.g. payroll, creditor payment, direct debit and accounting systems)
  • If customers pay you by direct debit, approach business customers for a waiver of the right to a no-questions-asked refund and review your credit control procedures and terms and conditions of business to protect against misuse of this right