better banking

Direct debits

13 Mar 2015

When you arrange a direct debit, you are essentially giving someone else permission to take funds directly from your bank account.  For example, you arrange a direct debit with your power or telecommunications company so your monthly bill payment can be taken automatically from your account without having to arrange it each time.

A direct debit authority is your instruction to your bank or another bank to accept debits from your account by another person or business (known as the direct debit initiator). You should be wary of any business that asks you to sign multiple or blank direct debit forms. If you do this, the business can submit a new direct debit authority after you have cancelled your existing one.

 

Is a direct debit the same as an automatic payment?

No.  Direct debts are different from automatic payments.  An automatic payment is an instruction to your bank to make a regular payment of a fixed amount from your account to someone else, either for a fixed period of time or indefinitely. 

A direct debit allows the direct debit initiator to submit the specific amount to be debited from your account – so the amount can vary each time.

 

What happens if I don’t have enough money in my account to pay the direct debit?

This depends on your bank’s commercial judgement in deciding whether or not to pay the direct debit. 

Some banks will not make the payment, while others will make it but may then reverse it.  Your bank may allow the transaction to occur even if there are insufficient funds in the account and treat it as a request for an overdraft.  You can find out more about overdrafts in our Overdrafts quick guide.

As with other forms of payment, direct debits have to go through the clearance system and can be dishonoured. 

 

Can I cancel a direct debit with my bank?

Yes, you can cancel a direct debit authority at any time through your bank – and your right to do so is usually set out on the direct debit authority form.  Generally your bank will require you to also give notice that you wish to cancel to the initiator.

The direct debit system is solely a method of collecting payments. Banks are not responsible for the underlying payment contract between you and the initiator. 

The bank must act on your instruction to cancel a direct debit authority.  However, to ensure payment instructions to your bank cease, you must also contact the initiator (eg your power or telecommunications company) to arrange this.  If the initiator is unaware of your instruction to cancel the authority, it will still send direct debit instructions to your bank. 

If you cancel a direct debit authority with the initiator whose services you are still using it will still expect payment (by some other means) for the agreed supply of its service.

 

What happens if my bank doesn’t cancel a direct debit authority when I ask it to?

If you suffer a direct financial loss as a result of your bank’s failure to cancel a direct debit authority, you may be entitled to compensation.  This could include a refund for overdraft fees or penalty interest resulting from the unauthorised direct debit(s).

Your bank may also be obliged to credit funds debited without authority, unless you benefitted in some way from the payments.   For example, if your power company has provided you with power, which you haven’t paid for another way, you have received a benefit from the direct debit payment, even though it was not authorised.

 

Case note

Miss J’s account was accidentally direct debited by company XYZ Ltd, with whom she had no relationship. She contacted her bank, who advised her to contact XYZ Ltd. She did so, and the debits were reversed the same day.

Miss J complained to her bank about the direct debit system as a whole. She was also unhappy about how her bank handled the problem and her complaint, and brought it to our office.

We were unable to assist Miss J with her direct debit system complaint as we are not a banking industry regulator. 

However, we investigated whether the bank appropriately dealt with and responded to her situation following the mistaken payment.

We determined that the bank had not breached any obligation or duty it owed Miss J regarding the direct debit because the bank had not made the error.  This was most likely made by XYZ Ltd or its customer. 

We noted banks have processes to deal with unauthorised transactions.  Customers are asked to notify their bank of unauthorised transactions within a certain timeframe and the bank will then investigate.  If the transaction is unauthorised, banks will generally reimburse the customer. 

In Miss J’s case, we found the bank could have communicated better, but Miss J’s experience did not meet the threshold to recommend compensation for stress and inconvenience, and her complaint was not upheld.

 

Download a PDF version of this Quick Guide.