The no-questions-asked refund right under the Core Direct Debit Scheme
Question: The Core Rulebook requires a no-questions-asked refund to be paid to a debtor (payer) within the 8-week period following a direct debit collection. However, articles 62-63 of the PSD mandate a refund right during this period only if the amount of the direct debit collection is unspecified and unexpected. How can the Rulebook and the PSD be reconciled? How are banks likely to cover these points within their terms and conditions?
Answer: The PSD is indeed less "generous" to payers than the Core Scheme Rulebook. When the Core Scheme was being created, it was considered very important that consumers should have complete confidence in the direct debit scheme, particularly as the model for direct debit might be unfamiliar in some countries. So the Core Scheme Rulebook includes the concept of an unconditional entitlement to a refund during the first 8 weeks after collection, without requiring the consumer to prove that the amount was unexpected. In practice this should be easier for banks from an operational perspective than having to make an investigation every time a debtor queries a collection.
The PSD does not prohibit this approach. Banks which continue to provide non-euro direct debit services will be able to place conditions on refund arrangements if they wish to do so, because the Rulebooks do not regulate such services. Banks participating in the Core Scheme are not obliged by the Rulebook to agree their refund arrangements in their terms of business, but the Rulebook does require scheme participants (payment service providers) to provide debtors with adequate information on the respective rights of the debtor, creditor (biller) and debtor bank.
However, the PSD says, in article 62(1), "For direct debits the payer and his payment service provider may agree in the framework contract that the payer is entitled to a refund from his payment service provider even though the conditions for refund in [article 62(1)] are not met." Good practice is thus likely to be that the framework contract is the place to put the explanation of the more generous refund right of the Core Scheme. Some banks are preparing leaflets which help debtors understand the Scheme and their refund entitlement, and tying this in as part of the framework contract.
The refund right under the Core Scheme in case the debtor is not a consumer
Question: How should banks deal with business customers who may be debtors? Business debtors may be debtors under the Core Scheme. The PSD allows the refund period to be shortened where the payment service user is not a consumer. Is a shorter period than 8 weeks allowed for no-questions-asked refunds to a business customer under the Core Scheme?
Answer: No. The Core Scheme requires uniform treatment of all debtors for refund purposes, regardless of their status as consumers or business customers. The PSD does not prohibit this approach. If the bank and its customers wish to cut back on the refund period, the B2B Scheme may be more suitable. This is for business customers only and there is no entitlement to a no-questions-asked refund.
Remediation of erroneous transactions under the B2B Scheme
Question: If the B2B Scheme is a no-refund scheme, how is it possible that the debtor bank might be obliged to give refunds for 13 months after collection?
Answer: There are three main provisions in the PSD about payers' rights to refunds. The first is only likely to be relevant in a B2B case if there has been a mistake as to whether the debtor is a business customer or a consumer:
- Debit Transfers - Article 62 of the PSD gives a refund right for a debit transfer if a) the authorisation did not specify the amount of the payment, and b) the amount exceeded the amount the payer could reasonably have expected. This article is more relevant to the Core Scheme, as a debtor bank and a non-consumer customer can agree that article 62 does not apply. Banks using the B2B Scheme will wish to make that agreement with their business customers, and to establish checks to ensure that the B2B Scheme is not inadvertently used with consumers. The liability period for an article 62 claim, where there has been a mistake about the customer's status, is limited by article 63 of the PSD to 8 weeks.
There are two further PSD provisions, which are more likely to be relevant in cases where the B2B Scheme is used. These are the following:
- Unauthorised Collections - Article 60 of the PSD says that, in the case of an unauthorised payment transaction, the payer's payment service provider (debtor bank) must immediately refund the amount of the unauthorised transaction. This article is not one which can be waived by agreement between the Debtor Bank and its business customer. So, if something has gone wrong, and the collection was not "authorised", the debtor bank will be liable for a refund. The period of liability is 13 months under article 58 of the PSD. In practice, the B2B Scheme has been designed to reduce the risk of unauthorised collections. The debtor is required to reach agreement with the debtor bank on checks which might be appropriate, including at minimum those listed in section PT 04-09 of the B2B Rulebook. These checks take place before the first collection. Furthermore, if the mandate is cancelled, the debtor must tell the debtor bank, and the Rulebook sets out procedures for ensuring that the debtor's account is not debited if the debtor has followed the cancellation process. With business customers, article 51(1) of the PSD allows debtor banks to agree a shorter period than 13 months for dealing with unauthorised or incorrectly executed transactions.
- Defective execution - Article 75(2) of the PSD makes a payer's payment service provider (debtor bank) liable to the payer (debtor) for non-executed or defectively executed direct debit payment transactions in cases where the creditor bank does not bear liability. Again, the liability of the debtor bank is to refund the debtor and the period of liability is 13 months (unless otherwise agreed between the debtor bank and the debtor). But in this case a debtor bank can agree with a non-consumer customer that the entire PSD rule about defective execution does not apply.
Additional practical advice regarding the implications of key provisions included in the PSD is available: the European banking industry's PSD Expert Group (PSD EG) established to support banks throughout the implementation process recently published a high-level guidance document to ensure consistent and efficient implementation across the in line with PSD objectives. A link to this PSD Expert Group guidance document can be found below.
Kevin Brown is the Chair of the Legal Support Group.
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