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Debit orders versus stop orders
The debit order system at banks, which allows companies to deduct payments for goods and services from your account, continues to be exploited to the detriment of consumers.
After backtracking on plans to limit debit order abuse last year, the banks - under pressure from the Financial Services Board (FSB) - have now agreed to apply stricter controls. But the onus remains on you, the account holder, to ensure you are not ripped off through a debit order.
Debit order abuse was highlighted by evidence in the Health & Racquet Club bankruptcy inquiry, where the fitness club illegally advanced debit order deductions of members by a month to bring in money earlier, to help it balance its books.
Personal Finance also has evidence of at least one major scam that banks have done little to stop. This debit order scam involves a Pretoria businessman who has allegedly, without the permission of the account holders, taken more than R12 million from at least 12 000 people.
The FSB has been investigating the man for the past three years. The businessman's trail was first picked up by the FSB when it noticed he was using the government payroll system, Persal, to deduct money - supposedly for tax services and insurance - from low income civil servants.
The FSB discovered that the so-called insurance premiums were never passed on to the underwriters, and inspections showed that the man was not selling anything.
Following a meeting between the FSB and the Banking Council this week, the banking industry is to tighten up the use of the debit order system by organisations. It will also be setting up a blacklist of those who abuse the system.
The debit order system currently offers considerable convenience to consumers and operates on the assumption that the users are trustworthy, Bob Tucker, the chief executive of the Banking Council, says.
Banks have undertaken to advise their branches that any unauthorised debits reported by an account holder must be reversed immediately. They have also have agreed to get tougher on sponsoring debit initiators - a bank has to sponsor an organisation before that organisation can collect money using the debit order system.
In the past there had not been co-operation between the banks and the FSB, but banks have committed to sharing information with the FSB, and to act upon information from the FSB, Tucker says.
He admitted the likelihood that not all false debits are reported to the banks concerned, but says he hoped that the sharing of information between banks and the FSB would improve the situation.
However, these measures are not a sure-fire guarantee that rogues cannot draw money from your account in the future.
The Pretoria businessman switched his attention to debit orders after being caught abusing the Persal payroll system. He obtains lists of employees and their bank account details from government departments and other organisations, claiming that he has tax refunds for the employees. He then organises deductions from the bank accounts using the bank's debit order system.
Oppie Opperman, the head of market conduct at the FSB, says the banks have failed to do anything to stop the culprit using the system - despite the fact that Opperman alerted the banks to the situation in January this year.
"I have given lists of account numbers and branches to the banks, asking them to inform their customers to close their accounts because this man has their account details, but the banks have refused to do anything about it," Opperman says.
Opperman has evidence that, in one case, the man deducted the same amount off the person's account five times in one month.
The FSB cannot act against the banks because it does not have jurisdiction over them.
Standard Bank, Absa and First National Bank say that neither the man, nor his companies, are currently registered to use their debit order system. But they all admit that he had, at some point, accessed the funds of account holders through them.
Standard Bank credited various account holders with more than R520 000 in June last year. In a letter to the FSB, the bank stated that the man was processing debit orders through other banks under a different name - yet nothing was done to prevent further abuse, other than alerting the Department of Education that some of its school teachers' accounts were being debited.
FNB stopped debit orders from the man when it was alerted to the problem, but did nothing further.
Reasons why the debit order system is open to abuse include:
- Lack of responsibility by banks. Banks rely on consumers to notice and report unauthorised debits;
- No checks by banks. The banks do not check to see if another person or organisation has your permission to draw money from your account - they rely on the integrity of the organisation that registers to use the system;
- No control over debit order agencies. Companies which want to deduct money from your account using a debit order generally outsource the work of preparing the bank accounts to be debited to processing agencies. There are hundreds of these agencies operating around the country;
- Difficulty stopping a debit order. If you do reverse a debit order, the criminal simply has to change the amount by one cent, and the bank's computer system will not be able to identify the debit order as the one you stopped. The only certain way to stop debit orders is to close your bank account; and
- Multiple deductions. A typical scam involves an organisation putting through more than one deduction a month. The banks are not able to prevent a debit order from being processed more than once. Armed with your account details, the organisation can dip into your account as often as it likes.
DEFINITIONS
Debit order:
The authority you give another person, or organisation, to draw a certain amount of money from your account on a regular basis. You can reverse a debit order for a particular transaction by filling in a form at your bank, but this does not prevent the organisation from putting through a debit order again the following month. To stop a debit order permanently, you have to cancel it with the organisation with which you signed the agreement.
Stop order:
The authority you give your bank to pay another person, or organisation, a certain sum on a regular basis. A stop order is safer than a debit order because you can cancel it permanently by instructing your bank to stop further payments. However, a stop order does not cater for payments that differ every month, such as electricity or telephone bills.
What you can do to protect your bank account
- Wherever possible, avoid using debit orders to make payments. It is better to make payments at an automatic teller machine (ATM), or via the internet, if you have signed up for internet banking.
- Only sign debit orders with reputable organisations.
- Always ask for a copy of the debit order authority and keep it on file.
- Specify a maximum amount that may be withdrawn from your bank account using a particular debit order.
- Add an expiry date on the debit order authority - for instance, state that the debit order is null and void after a year. If you still need to make payments to that organisation, you can sign a new debit order authority.
- Check your bank statements regularly. If you don't receive a statement, keep tabs on your balance. If it differs from what you think it should be, get a statement - preferably from an ATM, which is cheaper - to check on the amounts that have been deducted from your account.
- Contact your bank as soon as you notice any unauthorised deductions from your account. You will need to notify your bank in writing if you did not authorise a particular withdrawal, or if you have instructed the organisation to cancel your debit order but they are continuing to take money. Some banks have pre-printed forms for this purpose.