In the latest version of the Direct Debit Scheme Rules, there was a change to one of the Indemnity Claim Reasons. Now, Service Users who believe that an Indemnity Claim has been raised incorrectly for reason code 4 – “Payer cancelled the DDI with the Service User” can raise a challenge to it.
The Direct Debit Rules
Bacs, part of Pay.UK have recently released version 5.8 of “The Service User’s Guide and Rules to the Direct Debit Scheme”. Dated January 2025, this contains 166 pages of rules and guidance for Service Users. These include the rules surrounding the raising and challenging of Direct Debit Indemnity Claims (DDICs).
What is a Direct Debit Indemnity Claim?
If a payer believes an error has been made in the collection of their Direct Debit, they can ask their bank for a refund. Their bank will assess their request. If the bank believes it to be valid, the bank will refund the payer under the Direct Debit Guarantee. If the bank believe it is the Service Users error, they will then raise an ‘Indemnity claim’. This is so the bank can recover the money refunded to the payer. The Service User can choose to accept the Indemnity Claim – in which case, the money will be taken from their bank account. Alternatively, they can dispute – or ‘challenge’ the Direct Debit Indemnity Claim.
Rule changes relating to Indemnity Claims – section 7A.1
Previously Service Users could challenge most, but not all, of the reasons for an indemnity Claim. They could not challenge a DDIC raised for Reason Code 4 – previously identified as “Payer has cancelled the DDI direct with the Service User”. This has now changed.
In the latest update, the explanation of Reason Code 4 has been amended. It is now used if the “Payer has cancelled their contract directly with the service user, and therefore the underlying Direct Debit Instruction.” As well as a change to the wording of the reason code, Service Users are now able to challenge this reason if they believe it has been applied incorrectly. To do so, the Service User should produce evidence – either
- Evidence of goods/services still being provided in relation to the claimed DD (e.g., advance notices relating to ongoing collections related to use of goods/services, communication around active provision of goods/services), OR
- If applicable any information relating to reasons why a payer may use the Guarantee for a refund (e.g., a dispute in provision of goods/services).
Some examples of this could be where the Service User is an organisation like a gym, charitable attraction or membership body. If the organisation has evidence that a member has visited the gym or attended fitness classes; has attended a conference or has replied to or engaged with advance notices provided, then this evidence could apply here.
To Challenge or Not to Challenge?
Service Users should decide whether to challenge the DDIC. This decision could be based on various factors, e.g.
- if there is a belief that the DDIC was raised in error,
- evidence is available to support a challenge,
- the timescale and point at which the DDIC report is accessed,
- admin resources to manage the challenge, and
- company policy.
Whether the DDIC is challenged or not, it is important to remember that Direct Debit is the method of collecting payment only. A payer might receive their money back under the Direct Debit Guarantee. If so, their bank may raise a DDIC. The challenge process is not the only route open to the service user however. The service user retains its right to take action directly against the payer if they dispute the return of funds.
How DDIC Challenges should be managed
Service users should log into Payment Services Website (PSW) to raise the DDIC challenge. Doing so, ensures that the challenge can be electronically monitored with a full and available audit trail.
Once logged in to PSW, Service Users will use the “DDIC Challenge” functionality accessible via the left-hand menu. They can select the DDIC. They can then choose the basis upon which they want to challenge it. This is a selection from possible reasons in a drop-down list. Up to 5 pieces of ‘evidence’ to support the challenge can then be uploaded. Once completed, contacts can either submit the challenge, or it can be configured to require a second contacts approval.
If Service Users wish to raise a DDIC Challenge, they must do so before the end of working day nine. (The day that an Indemnity Claim is raised and a report made available for Service Users is counted as working day one).
What happens once a Direct Debit Indemnity Claim Challenge has been raised?
Once a challenge has been raised the payers bank will review the challenge and either accept or reject it. The status of the challenge will be updated on PSW and contacts can also be emailed. If the challenge is accepted, the DDIC will be cancelled. If the challenge is rejected by the bank, the reason for the rejection will be lodged on PSW. The paying bank will then collect the money from the Service Users account.
More Information is available
Direct Debit Indemnity Claims and Challenges is a complex area. Further details are contained within the newly released “Direct Debit Indemnity Claim Challenge process – Service User Guide”. This is version 1.5, dated 26 March 2025. This is available from the Bacs Information Hub. “The Service User’s Guide and Rules to the Direct Debit Scheme”, as well as other useful documents are also available via the Hub.
Questions?
Our team of experts are here to help. If you would like to better understand the Direct Debit Indemnity Claim process, rules and best practice approaches, please contact us.