Cancelling a direct debit authority: what are the legal rights of the parties involved?

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frednz

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# 249284 3-May-2019 17:11

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I have a question about the legal rights of the parties involved when a direct debit authority is cancelled with a bank by the customer.

In this case, the customer cancelled the monthly services he was receiving from the company (over the phone) and the company correctly used the direct debit authority to charge the customer with the final amount that was owing.

The customer then cancelled the direct debit authority with the bank (over the phone) and the bank acknowledged that they had cancelled it as instructed (also by phone).

About 4 weeks later, the company sent the customer a further invoice which was said to be an adjustment of the final invoice that had been charged to the customer’s bank account 4 weeks earlier. The company said this amount would be direct debited to the customer’s account.

So, the customer rang his bank and asked whether this invoice could be charged against his account. The bank advised the customer that, although it had cancelled the direct debit authority as requested, the company had the right to reinstate the direct debit based on the original authority it had from the customer if the company considered that it was still legally owed money by the customer.

The customer then advised the bank that the latest invoice from the company was in dispute and that he did not give the bank his authority to charge his bank account with any amount the company might charge on a reinstated direct debit.

However, the bank advised that it would be obliged to charge the customer’s account with amounts charged by the company using a reinstated direct debit, unless the customer could supply evidence that the company had agreed in writing that the direct debit authority had been cancelled by them.

So, the lessons to be learned from this case are that, if you want to cancel a direct debit, make sure that you advise the bank in writing of this instruction and that you also obtain in writing the bank’s confirmation that this has been actioned. Also, you should cancel in writing the direct debit authority with the company supplying the services and get their agreement to this, also in writing.

I had not heard before of a company having the right to reinstate a direct debit authority without the approval of the customer. Can anyone advise me please whether the bank’s advice on this matter is correct in law. Thanks for your help.

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Mad Scientist
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# 2230380 3-May-2019 17:28

Wow that is scary, didn't know that!

Swype on iOS is detrimental to accurate typing. Apologies in advance.

Stu1

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# 2230384 3-May-2019 17:46

Should be able to cancel over the phone with most banks as call recorded. The DD is a payment method it doesnt cancel the contract between the customer and the company. The bank I worked for we would advise customers that it could still be reloaded if they cancelled at the banks end but not with the merchant .I can see the company view if they provide a service they should still be paid . The most common complaint used to be gym membership contracts or kids using dad's credit card to verify their age to watch online porn

gregmcc

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# 2230390 3-May-2019 17:58

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The DD authority is an agreement between you and the bank, the form that started the DD would have something on it along the lines that the customer has the right to cancel the DD at any time.

So the customer cancelled after a final invoice was paid by DD, that's fair, customer cancelled DD, bank acknowledged DD cancellation(this should have been the end of the DD). business then issued another invoice "An adjustment" and the bank then re-activated an unauthorized DD.

The business has already issued a final invoice, any adjustments should have been agreed with the customer

The Business should not have the authority to re-activate a DD with the bank.

The bank should not have activated a DD without agreement from the customer.

If it was me, a call to the bank pointing out their error in activating an un-authorized DD and that they should fix it now by reversing it (keeping in mind that the bank acknowledged the cancellation of the DD and that was the end of the agreement). Should this not be completed within (insert your time frame here) there will be a complaint with the banking ombudsman.

floydbloke

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# 2230392 3-May-2019 18:01

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Batman:

Wow that is scary, didn't know that!

It's not widely published, but you're effectively giving the organisation a book of blank cheques.

I appreciate that they're extremely convenient so you don't have to worry about paying bills on time, but I deliberately have no direct debit authorities with any providers (other than the bank itself to pay of my credit card in full on its due date). When an invoice is in dispute, and I have had this happen, it is much easier to withhold payment than to try and recover it later on. It does of course require the discipline of remembering when bills are due.

The first 5 days after the weekend are the hardest.

Mike61

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# 2230414 3-May-2019 18:42

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Many years ago got something on hp and was given a direct debit form to take home and fill in and give to my bank. Had a read of it and one of the clauses was that it could only be cancelled with written permission from both parties, me and the company I was paying. Binned it and setup a direct credit instead which I could cancel at anytime. Never use direct debit if you can help it.

frednz

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# 2230417 3-May-2019 18:49

Stu1: Should be able to cancel over the phone with most banks as call recorded. The DD is a payment method it doesnt cancel the contract between the customer and the company. The bank I worked for we would advise customers that it could still be reloaded if they cancelled at the banks end but not with the merchant .I can see the company view if they provide a service they should still be paid . The most common complaint used to be gym membership contracts or kids using dad's credit card to verify their age to watch online porn

Thanks, but don't you think that cancelling the services received from the merchant would also mean that you have automatically cancelled the direct debit authority you originally gave to the merchant to pay for those services?

Of course, if there is any possibility a merchant can reload a direct debit authority after you have cancelled it with your bank, wouldn't the simple answer be to close that bank account?

frednz

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# 2230419 3-May-2019 18:59

gregmcc:

The DD authority is an agreement between you and the bank, the form that started the DD would have something on it along the lines that the customer has the right to cancel the DD at any time.

So the customer cancelled after a final invoice was paid by DD, that's fair, customer cancelled DD, bank acknowledged DD cancellation(this should have been the end of the DD). business then issued another invoice "An adjustment" and the bank then re-activated an unauthorized DD.

The business has already issued a final invoice, any adjustments should have been agreed with the customer

The Business should not have the authority to re-activate a DD with the bank.

The bank should not have activated a DD without agreement from the customer.

If it was me, a call to the bank pointing out their error in activating an un-authorized DD and that they should fix it now by reversing it (keeping in mind that the bank acknowledged the cancellation of the DD and that was the end of the agreement). Should this not be completed within (insert your time frame here) there will be a complaint with the banking ombudsman.

Thanks, I agree that the business should not have the authority to reactivate a direct debit authority with the bank. But it seems that this isn't how the banks view the situation.

I agree that the customer should be able to instruct the bank not to pay any amounts charged by the merchant on a reactivated direct debit. Surely the bank's customer has the right to decide what the bank can and can't charge to their bank account? Otherwise, the customer's only remedy is to close the bank account, or better still, change banks!

frednz

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# 2230421 3-May-2019 19:07

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Mike61: Many years ago got something on hp and was given a direct debit form to take home and fill in and give to my bank. Had a read of it and one of the clauses was that it could only be cancelled with written permission from both parties, me and the company I was paying. Binned it and setup a direct credit instead which I could cancel at anytime. Never use direct debit if you can help it.

Thanks Mike, that's what I've learned also, avoid using direct debit if possible. But, I have to admit, that a direct debit is probably the quickest and easiest payment method and the circumstances described in my post wouldn't happen very often.

It's good that you actually studied the direct debit form, but I doubt whether many people would worry too much about the cancellation clauses. Nevertheless, I now know that you should take these clauses seriously!

Stu1

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# 2230454 3-May-2019 19:55

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frednz:
Stu1: Should be able to cancel over the phone with most banks as call recorded. The DD is a payment method it doesnt cancel the contract between the customer and the company. The bank I worked for we would advise customers that it could still be reloaded if they cancelled at the banks end but not with the merchant .I can see the company view if they provide a service they should still be paid . The most common complaint used to be gym membership contracts or kids using dad's credit card to verify their age to watch online porn

Thanks, but don't you think that cancelling the services received from the merchant would also mean that you have automatically cancelled the direct debit authority you originally gave to the merchant to pay for those services?

Of course, if there is any possibility a merchant can reload a direct debit authority after you have cancelled it with your bank, wouldn't the simple answer be to close that bank account?

Not in all cases a common example is tv shopping where you buy products and agree to 4 payment amounts of x. The merchant sends you the goods you can’t expect to cancel the DD payment after one payment you still have to pay what’s owed. Customers have in the past closed transactional accounts to prevent the account being debited unfortunately a lot of them in the case of gyms end up with credit defaults as they still have a membership contract with a gym. I would never pay by DD given the amount of issues I saw working in the bank

OldGeek

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# 2230458 3-May-2019 20:01

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To the OP: consider approaching the NZ Banking Ombudsman (https://bankomb.org.nz/)

Separately, in the UK direct debits are handled by a third party (https://www.bacs.co.uk/About/Pages/CorporateOverview.aspx). The benefit of this is that entities wishing to offer their customers a Direct Debit payment option are vetted and accredited by a third party and those whose who agree to Direct Debit payments being taken from their account have the protection of a payment system operated and controlled by a third party. Disputes between debtor and creditor are therefore easily resolved.

Direct Debit options in NZ are controlled by the merchant's bank. As other posters here have pointed out, direct debit authorisation forms often contain more than just an authority to debit a debtor's account such as granting rights to the merchant that limit authority revocation by the debtor.

Where a dispute arises, the first approach for a debtor is to ask the merchant (creditor) to please take no further payments, and include their bank in this. If there is no response within a few days, or the response is not to the debtor's liking, threaten to approach the NZ Banking Ombudsman. Be prepared to follow through. In my case (as a debtor), the threat was enough in that my bank then assured me that any future direct debit transaction from that merchant would be dishonoured (like a bounced cheque). Clearly they did not want an approach to the Ombudsman.

Because there is no independent administration of Direct Debits in NZ, my default is no DDs. However in some circumstances I will allow the practice if the merchant insists and I value their service enough to allow it.

--

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mudguard

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# 2230499 3-May-2019 22:20

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From memory

Direct Debit, you have no control, you're signing away authority to charge your account

Automatic Payment, you have full control.

So be wary signing DDs, if you can, always pay manually or set up an AP.

Torque

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# 2230525 3-May-2019 23:32

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Worked for a bank briefly last decade - as per Mike & Stu, the merchant could reload the DD as you have given them, in writing at the outset (generally speaking, having not read more than a few) authority to lodge it again and that cancelling it could only be done with the consent of both parties.

I vaguely recall of two DD issues around cancellation that went to the Banking Ombudsman with the bank I worked for and both were in favour of the bank. DD's are ugly and not something I would ever want to use as all the power is with the merchant.

mattwnz

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# 2230528 4-May-2019 00:01

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I didn't know that , and is probably something banks should educate customers about. I think the lesson IMO is avoid direct debit. The only thing I use it for is kiwisaver, everything else I use direct credit, pay manually, or credit card.

jonathan18

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# 2230537 4-May-2019 07:22

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I’ve been guilty of signing up to a DD with Spark previously and now 2degrees for broadband, given it combines the benefits of not having to manage any changes in bill amounts and avoiding the not inconsiderable credit card fees.

I recall that setting up both of these was totally painless, compared to the olde days of having to print out, sign and scan the form type of approach. I’m assuming I could have clicked on a link to see the conditions of the DD, but don’t recall seeing this (more fool me), however this highlights how easy it can be to get into a situation of handing over control to a company.

I understood that with an AP, given it is initiated by the customer, that if a bill varies then the customer must adjust the amount - is that correct? I guess with BB it’s usually only the first few months that often vary due to one-off fees, credits etc - but still, I’d rather have both no fees and ease of payment!

eracode

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# 2230539 4-May-2019 07:30

mattwnz:
I didn't know that , and is probably something banks should educate customers about. I think the lesson IMO is avoid direct debit. The only thing I use it for is kiwisaver, everything else I use direct credit, pay manually, or credit card.

Of course what you say is quite correct - but unfortunately it’s way too convenient for me not to use it.

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