From: Mark Goodge 
Newsgroups: uk.finance uk.legal
Subject: Re: The Direct Debit Guarantee (DDG)
Date: Sun, 03 Jun 2007 14:42:47 +0100

On Sun, 03 Jun 2007 12:24:39 -0000, TimB put finger to keyboard and
typed:

>On 3 Jun, 12:17, johannes  wrote:
>>
>> It was quite an odd case indeed, since the stockbroker used the DD mechanism
>> to take the money. Seems financial-ombudsman favoured the bank.
>
>I see it now...yes, very strange, since DD is the only method I'm
>aware of to allow a third party to access a bank account directly,
>unless the stockbroker also had the customers debit card details. Even
>so, the fact the DD *was* used should make the transaction subject to
>the DD guarantee. If the broker is authorised to access the account
>using other means, then he should use them.

DD isn't anything special in itself. The mechanism for debiting a bank
account from the recipient end, rather than the sender end, has always
existed and can always be exercised where the appropriate contract
exists. However, due to the possible dangers of such an arrangement,
it was historically only used in very limited situations where both
sides trusted each other fully (or had a watertight contract which
made improper use virtually impossible). The concept of the Direct
Debit, and the associated DDG, was created precisely in order to allow
this mechanism to be used in cases where such contracts did not exist
and/or the two parties did not enjoy that level of trust - which is
the case in most low value B2C transactions. The DDG provides a
universally applicable guarantee that would otherwise need to be
negotiated individually with each contract that involved
recipient-initiated debits. 

At the technical level, though, a DD and any other recipient-initiated
debts are the same thing - they're essentially just a BACS payment
where the instruction comes from the recepient rather than the sender.
The BACS system itself doesn't make any assessment of validity; that's
judged by the sending bank. If the bank has a DD mandate on file for
the relevent account and recipient, then they authorise it. But they
can also authorise it if they have some other legally binding
instruction to do so - such as an individually negotiated contract, or
even from a third party (it's possible for a recipient-initiated debit
to be authorised by a court, for example in the case of asset
confiscation following criminal conviction).

What appears to have happened in the particular case highlighted by
Johannes is that the bank had both a DD *and* a separate, individual
authorisation for the recipient to deduct money from the customer's
account. So, when the debit came through and it was authorised, it was
initially assumed to have been authorised by the DD. It was only after
the DD was cancelled and the recipient continued to debit the account
that it was found not to be authorised by the DD (and hence not
covered by the DDG) as the separate agreement was still in force.

Mark
-- 
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