An insurance company has challenged national payment system rules that allow debit order reversals on bank accounts, saying it is losing money that it rightly owns.
Last week, the Gauteng High Court considered an application by insurance group Clientèle that the Payments Association of South Africa (Pasa) change its rules governing debit orders. The application was postponed so that other interested parties, such as the SA Reserve Bank and the banks themselves, could be joined in the case.
Consumers have been able to query and reverse debit orders after Pasa and the major banks put measures in place to curb a scourge of debit order scams in the mid-2010s. Nowadays, banking apps have a built-in feature whereby you can reverse a debit order at the touch of a button. The feature is not intended to be used to reverse legitimate payments, but, with many consumers facing challenging times financially, the practice is on the rise.
Other insurers are also affected: in its recent half-year results report, Santam said its MiWay division had experienced an uptick in rejected debit orders.
Clientèle’s main argument was that the money reversed from its bank account was its property and, under the Constitution, “no law may permit arbitrary deprivation of property”.
The insurer sought to declare Pasa’s rules unconstitutional or, alternatively, for a judicial review of Pasa’s authority to make the rules.
The court documents present the insurer’s case as follows:
“When Clientèle contracts with a new client it gets the client to provide a debit order in favour of Clientèle. Each month, the insured person pays the premium on a policy by way of debit order. Over time, Clientèle has become ever more concerned at the increasing rate of debit orders going through but then being reversed.
“The rules issued by Pasa regarding payment and the ability of insured persons to reverse payment are the focus of this application. They contain what is referred to by the parties as the Immediate Reversal Rule. Broadly, an insured person who does not want to pay or perhaps can’t afford a monthly payment tells his or her bank not to honour the debit order with the consequence that if payment has gone through to Clientèle, the credit in Clientèle’s account with its bank is reversed. Clientèle does not have the opportunity to contest the reversal by, for example, providing the paying bank with a written debit order mandate signed by the insured person.
“Clientèle seeks effectively to set aside the rules of Pasa to the extent necessary to curb this practice. In short, Clientèle seeks a rule change to allow Clientèle an opportunity to provide proof of a valid mandate before reversal takes place.”
Clientèle’s group managing director, Basil Reekie, told Personal Finance that there were three main reasons why it was important for more controls on consumers reversing debit orders:
“Firstly, the current lack of controls encourages unethical behaviour by consumers who legitimately consented to debit order deductions being made from their bank accounts.
“Secondly, unethical debit order reversals cost, among others, the financial services industry hundreds of millions of rand in losses each year.
“Thirdly, losses being suffered by service providers (like Clientèle) as a consequence of unethical debit order reversals by the minority of consumers result in increased pricing (in our case insurance premiums) for the ethical majority of consumers.”
Reekie said the problem had been exacerbated by recent changes.
“Previously, the rules allowed for reversals of transactions within the last 40 days. This has been changed such that debit orders are being reversed up to 365 days after the payment was made. The absurdity of this can be clearly seen when one considers a client who has paid premiums for 15 years who then disputes the last 12 months’ premiums and these are instantly taken from our bank account,” he said.
Pasa has been aware of the abuse from the outset, and in 2019, to counteract it, instituted the DebiCheck system, whereby a debit order is authenticated and authorised at inception. However, there have been teething problems with DebiCheck, and banking apps retain the debit-reversal feature for existing debit orders.
When approached for comment, Pasa told Personal Finance that, “while acknowledging the importance and efficiency of debit orders to various sectors of the South African economy, it also recognises and seeks to prevent two types of debit order abuse: rogue collectors processing debit orders without consumers’ consent, and consumers that avoid paying valid debit orders by unfairly disputing these debit orders with their banks”.
Pasa said its initial focus was on dealing with the rogue collectors, experienced by consumers in the form of R99 and R199 unauthorised collections from bank accounts.
“This focus has been extremely successful, with billions of rand of rogue collections removed from the payment system in recent years and ongoing prosecutions of rogue collectors,” the agency said.
“The DebiCheck solution that allows authentication of debit order mandates has also proven to protect both consumers and collectors, in that collections done under an authenticated mandate cannot be unfairly disputed, while collections that do not meet the terms of the authenticated mandate will not be processed. DebiCheck makes up 28% of debit orders in South Africa today.
“Within this context of balancing the rights of collectors and consumers, Pasa recognises that protection of consumers’ money is paramount, and over the past few decades, has formulated and continually improved on debit order payment systems and the associated rules intended to protect their credibility, efficiency and effectiveness, and the rights of the various users of the payment systems,” Pasa said.