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Direct Debits

The BIS definition of a direct debit is short but the product is more complex. The definition reads "a preauthorised debit on the payer’s bank account initiated by the payee."

A more appropriate definition might be that a direct debit "is a scheme whereby you as an account-holder authorise payees (e.g. utility companies, insurance companies, mortgage companies) to charge amounts (unspecified at the time of authorisation) to your account provided that they notify you of the detailed amounts to be charged".

Direct debit is a preferred method for payment of utility bills, insurance, mortgage repayments, gym memberships, etc and many other forms of recurring payments.

New Direct Debit Legislation

If you are familiar with direct debits, you may not have realised that the underlying operation of direct debits has changed from Nov 1st 2009, and further changes will occur. The payers rights are now clarified and enshrined in legislation and include:-

  • If you authorise payment by direct debit, then
    • The Originator will notify you in advance of the amounts to be debited to your account
    • Your Bank will accept and pay such debits, provided that your account has sufficient available funds
    • If it is established that an unauthorised direct debit was charged to your account, you are guaranteed a prompt refund by your Bank of the amount so charged where you notify your Bank without undue delay on becoming aware of the unauthorised direct debit, and in any event no later than 13 months after the date of debiting of such direct debit to your account
    • You are entitled to request a refund of any variable direct debit which exceeded the amount which you could reasonably have expected, subject to you so requesting your Bank within a period of 8 weeks from the date of debiting such direct debit to your account
    • You can instruct your bank to refuse a direct debit payment by writing in good time to your Bank
    • You can cancel the Direct Debit Instruction by writing in good time to your Bank
  • The introduction of the SEPA Direct Debit. The Irish direct debit is a national scheme in which only payers and payees within Ireland can participate. The SEPA Direct Debit can include payers and payees from any country in Europe, provided that the transaction is denominated in euro. At the time of writing, we are not aware of any use of this service in Ireland.

Trust and the Direct Debit

The Direct Debit scheme is highly dependent upon the maintenance of trust. In effect, when you sign a direct debit mandate you have signed a book of electronic bank cheques, in which the amounts will be filled in by the payee, presented by his bank to your bank and paid. So you must trust all parties. Hence the creation of a Direct Debit scheme, with strict rules and regulations to preserve that trust. To participate in the Direct Debit Scheme, the payee organisation must firstly go through a vetting procedure undertaken by his bank, and secondly, must sign comprehensive legal documents binding him to the scheme rules. In practice, there are few problems arising from failures of trust, and the payee can be assured that the scheme and its participants can be trusted in respect of the payments involved. (This does not mean that system failures never occur)

It should be noted, however, that the scheme covers only the payment process. It does not cover the performance of the contract which gave rise to the payments.

As a bank customer, your linkage with the scheme is through your bank, and your bank should resolve any issues arising.

Direct Debit Rules

The Direct Debit rules are available on the website. The scheme is operated by Irish Retail Electronic Clearing Company Ltd (IRECC), a company under the IPSO umbrella and owned by the retail banks.

Setting up a direct debit

There are two ways of setting up a direct debit:

  • By signing a direct debit instruction (DDI)
  • By authorising a direct debit remotely (over the phone or online)

Setting up a direct debit using The Direct Debit Instruction (DDI)      

The payee who is a participant in the Direct Debit scheme will provide you with a Direct Debit Instruction form. The specimen form (below) is reprinted from the Direct Debit Rules, but the layout and general appearance may vary to fit in with the style of the other literature of the payee.

Before signing the direct debit, you should fully satisfy yourself regarding the price of the product or service you are paying for. So you should not get surprises. You should return the DDI to the payee.

Before charging any items to your account, the payee should notify you of the amount to be charged. If the amount varies, then the payee should notify you each time the amount changes - if the amount is constant, then a once-off notification will suffice. Normally, the notification should be two weeks in advance of the date of charging, but there are exceptions. Such exceptions should have a clear clause in the documentation which you sign which outlines the procedure for notification. The notification will specify the date on which the item will be charged to your account.


Setting up a direct debit over the phone or outline

A direct debit can be set up without signature over the phone for certain payees. This will normally happen as part of a telephone conversation agreeing to buy a service. When the details of the service have been agreed, the company representative will commence a structured conversation according to a prepared script. The script should be clear and unambiguous, and you will be in no doubt about what you are committing to. There will be questions to identify you clearly - your name, address, etc. There will be questions about your bank account - what bank and branch?, whether the account is in sole or joint names, and whether you have authority to sign for that account, etc. The telephone conversation is likely to be recorded.

Within a few days, you should receive a letter confirming details of the direct debit which you have agreed to. You should check such letters carefully. If there are any terms which you haven't agreed, (or if you get such a letter out of the blue without any prior call) you should notify the company and your bank immediately.

As in the case of a paper DDI, you will be notified of the amounts to be charged to your account, but the interval between sign-up and charging may be shorter.

If you dispute the amount to be debited

Ideally you should challenge the amount before it is charged to your account - that is why you get advance notice. If you are not fully satisfied with the response from your payee, then you should notify your bank and cancel the payment. If you want to challenge it later, and the payee and the banks have both conformed to Direct Debit procedures, then your bank has little to offer - the position is similar to recovering money after a cheque has been paid. You will have to argue your case with the payee, and if necessary, do so in court.

If you want to cancel a direct debit

In the direct debit you have authorised your bank to pay amounts from your account. Accordingly, if you want to cancel, you should notify your own bank. It is a good idea to also notify the payee also.

If the Direct Debit relates to monthly subscriptions of an annual contract (the typical case is your gym subscription) the payee may tell you that you cannot cancel the Direct Debit. This is not correct - you can cancel. But if you do, you may find that you are still liable for payments under your annual contract, and the payee may chase you for payment by another means.

From the payees point of view

To participate in the scheme, a company must satisfy it's bank from a legal and operational point of view that it has the capability to meet the requirements of the scheme. It's bank will then act as a sponsor for the company.

Having satisfied the requirements to notify it's customers regarding amounts to be charged, the company will regularly submit to it's bank a file of direct debits. On the due date, the debits will be submitted to your bank through the electronic clearing system.