Update 13th December 2012: The OFT have rules that all businesses must ensure that they fully meet their legal responsibilities when using CPAs, including that they:
- are fully transparent about terms before a consumer signs up to a CPA arrangement
- ensure the consumer has given informed consent to the use of a CPA, and do not use ‘opt out’ provisions or other means to automatically assume the consumer has given consent
- provide adequate notice of any changes to the scope of the agreed authority, such as the amount or timing of payments
- provide clear and prominent information on how to cancel a CPA.
Update 20th November 2012: The Office of Fair trading (OFT) is investigating several payday lenders over aggressive debt collection practices. They will also contact all 240 payday lenders highlighting their concerns over their methods. Some of these companies risk enforcement action.
When you give your credit or debit card details to a company and authorise them to take regular payments it’s known as a ‘recurring transaction’ or ‘continuous payment authority’ (CPA).
They work like a direct debits, but can be very difficult to cancel and they don’t offer the same guarantee if the amount or payment date changes. This means companies can take as much as they like without giving you notice.
They’re sometimes used for gym memberships and magazine subscriptions but we see them most commonly for payday loan repayments.
We’ve come across many cases where payday loan companies have refused to stop taking payments, even if the client is struggling and has already been to us for help.
We’ve also come across cases where the client’s bank or card provider has said that they’re unable to prevent the payments going through. This leaves many of our clients in financial hardship, and potentially means they could be repaying their payday loan instead of their priority debts.
Today we look at what this means for someone who’s struggling to pay back a payday loan.
The FSA and continuous payment authorities
Earlier this year the Financial Services Authority (FSA) confirmed that under the Payments Services Regulations (PSR), a customer can cancel a continuous payment authority by contacting their bank or the card issuer.
Once you’ve told the bank to cancel the authority, it becomes an ‘unauthorised transaction’ and the bank shouldn’t make any further payments. If the bank does make a payment they’re in breach of the PSR and you’re entitled to an immediate refund (or slightly later if it’s a credit card payment).
The banks have now accepted this as their obligation under the PSR. Unfortunately the technology isn’t in place yet for the bank to be able to stop the payment if the payday lender requests it but the bank must still re-credit you with the payment.
In the future the banks will change their technology so they can stop any payments, but unfortunately we’re not sure when this will be available.
So what should you do?
If you’ve got a CPA set up with a lender and you can’t afford it, your course of action depends on how long you have before the payment is due.
…If it’s the day before…
You will need to speak to your bank by the end of the working day. If there’s not enough time to do this (because the payment’s due today for example) unfortunately you won’t be able to stop the payment in time.
You should still cancel future payments and in some instances you might be able to speak to the lender to see if they will roll the payment over.
…1-5 working days before the payment’s due…
Contact your bank by email and phone. Ask the advisor to record the instruction to cancel and don’t forget to ask for their name and make a note of the date and time of the call.
You should also phone the lender, and also email them using our cancelling continuous payment authority template letter to let them know that you’ve withdrawn your permission from the bank. Again keep a note of the time and date you speak to them as well as the advisor’s name.
…5 or more working days before the payment is due…
You can write to your bank asking them to cancel the CPA. It’s best to send this recorded delivery and keep a copy of the letter and proof of postage. You can call them to double check that they’ve received it and made a note on their system.
Similar to the previous option you should use the continuous authority template letter to inform the lender. If you send this by post you don’t have to send it recorded delivery but keep a copy and ask for a certificate of posting from the post office.
If the bank refuses to cancel the payments you can make an official complaint. If they don’t give you a satisfactory response you can refer your case to the Financial Ombudsman Service.
How to avoid recurring payments on a payday loan
It can be a tricky situation to get out of, so it’s sometimes best to try and avoid it all together. Here are some alternatives you can consider:
- Change to direct debit: If the company or lender has this facility then use this; direct debits are much easier to cancel and if there’s an error the bank should refund you immediately
- Pay manually: It could mean remembering to make the payment each month but it’s much safer
- Standing order: These are easy to set up and cancel because you’re in complete control.
- Prepaid cards: You top up these cards in advance much like a pay-as you-go phone. Read more about prepaid cards.
If you’re struggling to maintain payments on a payday loan or any other kind of debt, use our online counselling service Debt Remedy for free and impartial advice. We can look at all the options that might be available to you.