Finding ways to address the potential legal downsides of SEPA will make the changeover a more positive experience for businesses, writes Philip Daly.
Most businesses will have been inundated in recent months with missives from their banks about the imminent February 1st 2014 implementation of the SEPA (Single Euro Payment Area) initiative.
In preparing for SEPA, there are a number of ‘must do’ actions for businesses which banks have focused on, including implementation of new file submission standards and the move from national account numbers and sort codes to the new BIC and IBAN.
Many businesses, however, may not be aware of the potential impact of the new pro-consumer practices that are being implemented under SEPA which could seriously disadvantage them if they do not take active steps to redress the balance.
Right to refund
SEPA’s Core Direct Debit Scheme permits a customer who has paid for goods or services by way of direct debit to seek refunds of amounts debited from their accounts on a ‘no questions asked’ basis up to eight weeks after the debit date. This right applies to customers who are individual consumers or businesses. Business customers by agreement can however waive this right. The right to refund is automatic, with no requirement for the customer to show that they have any grounds for disputing the validity of the charge. The customer’s bank will then recover the debited sum from the bank of the business who will in turn recover the sum from the business, leaving the business out of pocket. This could have serious repercussions for the cashflow position of a business depending on the extent to which customers exercise this right.
The right to refund will apply even where the goods or services may have already been received by the customer.
Given that there will have been a cost to the business in providing such goods or services, that cost coupled with the loss of expected income will negatively impact on cashflow.
Whilst unlikely, given the convenience of payment by way of direct debit for both customers and businesses, businesses may choose to protect themselves by seeking payment from larger customers by another means to avoid the refund risk.
Businesses should review their debt recovery processes to confirm that they have an effective system in place to recover any validly debited amounts refunded to customers. The refund rule is heavily pro-consumer to the potential detriment of businesses, but is balanced to an extent by providing that payment of a ‘no questions asked’ refund to a customer will not prejudice the outcome of a dispute over payment between a customer and a business.
This means that even though a direct debit payment may have been refunded to a customer, if the goods or services have been provided to the customer, the business can still attempt to collect the sum due by way of debt collection. Of course, if the customer is insolvent, the debt collection proceedings may be of no benefit.
One effective way of protecting against the dangers of the ‘no questions asked’ refund is to introduce measures that make it less attractive for a customer to avail of the refund facility. Businesses should consider making changes to their standard terms and conditions to lessen the occurrence and impact of such claims. Such changes could involve including provision for retention of title on goods sold and the introduction of interest for late payment arising out of a direct debit refund.
Changes to standard terms and conditions could also be of benefit in dealing with other requirements of SEPA. For example, under the SEPA Core Direct Debit Scheme rules, a pre-notification must be sent by a business to a direct debit customer at the latest 14 days before the due date for payment of debt. The rules permit a business and customer to agree an alternative timeline for such a notification. One easy way for a business to comply with the notification requirement is to amend its terms and conditions to provide for an alternative shorter timeframe that will apply to all direct debit transactions.
SEPA Core Direct Debit Scheme applies to all direct debit customers, whether an individual consumer or a business. SEPA also provides for a separate business to business scheme, called the B2B Scheme. One key difference of the B2B scheme is that the ‘no questions asked’ refund is not a feature.
Unfortunately, the main banks in Ireland have not yet registered as participants for the B2B scheme. However, following lobbying from ISME, a temporary solution has been introduced to avoid creditors being disadvantaged by the slow bank uptake. The solution agreed by the Irish Payment Services Organisation is referred to as the SEPA Business Service.
This will involve business debtors completing a debtor confirmation, waiving their right to the ‘no questions asked’ refund for authorised transactions and confirming that they are a business customer.
SEPA will likely prove to be a fantastic opportunity for Irish businesses, making it easier to trade with both suppliers and customers throughout the SEPA zone. Giving some advance thought to and finding ways to address the potential legal downsides will certainly make the changeover to SEPA a more positive experience for businesses.
Philip Daly is a partner in the Corporate and Commercial Department at LK Shields Solicitors.