Updates which came into force at the start of February to the Direct Debit Guarantee Indemnity Scheme (DDGIS) are due to substantially improve the ability of motor finance companies, and indeed any company which receives payments through a direct debit, to combat fraudulent claims.
More changes are expected in the future, Motor Finance understands.
The DDGIS scheme is the process whereby consumers who believe they have wrongly had money taken out of their account are able to reclaim it relatively easily.
According to Bacs, the organisation responsible for the schemes behind the clearing and settlement of direct debits, almost 9 in 10 Britons have at least one direct debit.
The importance of direct debit is not waning: In September 2016 109.3m transactions were processed this way, the largest number in history. Errors occasionally occur, however, making the reclaim process necessary.
According to Adrian Dally, head of motor finance at the Finance & Leasing Association (FLA), in the vast majority of cases the reclaim process works without any problems.
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However, he added that until now in some respects the system has not been sufficiently balanced, with the process favouring the paying bank as opposed to the recipient member.
One example of this is that payments could be automatically taken from a lender’s account and refunded to the customer before the lender had the chance to launch a challenge.
The change, which took place on 1 February 2017, involved the addition of a counter-claim and challenge procedure to the process. Explaining part of the problem with the rules, Dally said: “The difficultly here is that it is at the discretion of the paying bank; they control the process, and it’s not really independent.
“For example, where you have got a third party involved like one of our members, a consumer’s paying bank could be paying on a direct debit, and in month 35 of 36 of an HP agreement, the consumer could go to their paying bank and say: ‘I’ve never authorised those monthly payments to the car.’ Under the current rules, essentially the bank immediately refunds the customer and the onus is on the FLA member to show why that was not the case and the claim was fraudulent.”
Under the new rules, members now have a 14-day window in which they can challenge claims, provide evidence that the claim is fraudulent and explain why the customer should not receive the money back.
A spokesperson for Bacs told Motor Finance: “For the last two to three years, we have been working with a range of stakeholders using direct debit to ensure that the refund process works equitably for all.
“That includes payees, to ensure that they receive appropriate refunds; collecting organisations, to minimise losses from misuse or fraudulent claims; and banks, so that they can apply the rules effectively. The work has resulted in an update to our rules, not least to accommodate the different ways that consumers and businesses sign up to pay by direct debit.
“All staff from motor sector organisations using direct debit for collecting payments have access to the full Guide & Rules document in the secure area of our website, www.bacs.co.uk, and we would encourage them to review the changes we have made as soon as possible.
“For obvious reasons, and in the interest of fraud prevention, this documentation and the detail it contains is confidential and cannot be shared publicly.”
This is only the first step in updating the DDGIS. In December, Bacs consulted on a number of topics about the system, and how it could be improved.
Currently there is no time limit on customer reclaims. If a customer wishes, they are able to lodge a claim on a HP deal from several years ago. This is despite the fact that most lenders do not hold information on a customer indefinitely – there is no regulatory or legal reason to do so; in fact some kinds of information cannot be kept permanently due to data protection rules.
Dally said: “We have been arguing that there are time limits in other sectors, which range from three months to a year, and we’re arguing with that. For example, Visa and MasterCard chargeback arrangements have a four-month time limit, in real time, and that would sound right to us.
“You could potentially make the case that some direct debits are annual payments. So having a limit that is just over a year for annual payments – say 13 months – would be reasonable. That was one aspect of the consultation that banks went on – if they did introduce a time limit, what should that be?
“We’re optimistic that the current open-ended process will have a time limit, presumably somewhere in that four-to-13-month window.”
A second area consulted on was mandatory checks. Currently there is no explicit rule that the paying bank needs to carry out checks on a refund claim, although many do.
According to Dally, FLA members have reported cases where a paying bank has given a refund without checking the merits of the case.
As a result, he notes: “We think there ought to be a mandatory investigation into the refunds of payments, especially when they’re more significant, and it might be possible to specify some kind of threshold of claim above which the paying bank must do a proper investigation.
“We would certainly expect payments made on a motor finance claim to be ones which should always be investigated. Having mandatory checks, potentially above a threshold, would be a big step forward.”
Although the changes may appear to be minor, they have the potential to protect companies receiving payments by direct debit against various types of fraud.