July & August 2016 Credit Management magazine

FEATURE
SPECIAL
continued from page 25
A Direct Debit as
defined by Bacs:
A Direct Debit is an instruction from
a business or individual to their bank
or building society. It authorises the
organisation you want to pay to collect
varying amounts from your account – but
only if you’ve been given advanced notice
of the amounts and dates of collection.
Once those have been agreed, the money is
deducted automatically. If the organisation
you are paying wants to change an amount
or date of collection, they have to tell you
about it first. A Direct Debit is the simplest
and most convenient way for you to pay
regular and occasional bills.
A well-known global business was approached
to supply services to a new client paid for by
DD on credit terms. On investigating the credit
history of the new client further, it was agreed
to trade on a fully secured basis, with the client
lodging c£30,000 with the creditor from which the
payments would be honoured.
All went well for the first seven months at
which point the business was asked by its client
whether it would invoice a different company
name, citing ‘VAT registration issues’ as an
excuse. The creditor was also approached by an
accountant from a respected practice who made
a similar request on behalf of his client. The
request was declined for obvious contractual
reasons. It was then, however, that things started
to go wrong.
Within days of the request being declined, the
first of what ended up being a large number of
Indemnity Claims were made for Direct Debits
made near the start of the contract – ie many
months previously. While the credit manager in
question contacted the client’s bank and lodged
a formal appeal, the help he received was less
than impressive. At best, the bank appeared
disinterested. Happily for the credit manager,
however, he had the weight of a global brand
behind him, and once his Treasury function
became involved, the complaint was elevated to
the highest level and action was taken.
“We had to convince the bank that we were the
victim of a fraud,” he says, “but it was only after
we challenged the bank that by doing nothing it
was effectively allowing a fraud to continue that
we began to make any progress.”
The net result was a loss of c£140,000, a not
inconsiderable sum and an amount that could
have been even higher had not the credit
manager taken the action that he did.
POOR TIMING
The story serves to illustrate one of the biggest
gripes that credit managers have about
Direct Debits. Much as they acknowledge and
appreciate the benefits that Direct Debits bring,
the current rules for Indemnity Claims appear
to be somewhat distorted. Certainly it seems
somehow incongruous that a claim can be
brought six years after the event, an event that
most would agree could have (and usually is)
discovered within a matter of days.
Steve Kershaw ACICM, Credit Manager at The
Right Fuelcard Company is one: “Overall Direct
Debits are a great payment tool and all of our
new client accounts are opened on a Direct Debit
basis,”he explains. “But there should be a much
tighter timeframe for when Indemnity Claims
can be made and the creditor should be offered
greater protection. Bacs could set higher levels of
due diligence, for example, for higher values to
prevent the system from being abused.”
Steve speaks from experience, when a client
claimed it had cancelled its Direct Debit when it
hadn’t. A large sum of money was clawed back
by the client bank and he found he had nowhere
to go. “We hit a brick wall,” he admits. “The client
and bank were protected but we were exposed.
We were told we needed to be paid by the client
direct, but by that time the firm was in the process
of becoming insolvent.”
In all cases the borrower’s bank is obliged
to make an immediate reimbursement to the
borrower for all payments it is alleged have
been taken without correct authority. The
borrower’s bank will then contact the lender
to clawback the money from them.
continues on page 28
The recognised standard in credit management
www.cicm.com July / August 2016 27