Firms are liable if incorrect direct debits taken

Direct debits are a convenient way to pay utility bills, insurance premiums and various subscriptions, as well as being the standard method of spreading repayments on consumer loans.

The problem is, however, that direct debits are so convenient that we tend to forget about them once they're up and running. Pretty soon, ESB, Bord Gáis, NTL, Eircom, a credit card provider, a mobile phone company, a trade union and a health insurance company are quietly chipping away at our bank balances.

The direct debit mandate is an agreement between the customer and the company collecting the direct debit. This company is known as the "originator" of the direct debit.

The bank facilitates the payment, and, in the process makes money from a number of charges connected to the operation of direct debits.

These charges include set-up fees of between €3.17 and €5, a small charge (20-28c) per transaction, a charge of €4.44-€12.70 if the direct debit fails because there is insufficient funds in the account and a charge if the debiting of the payment plunges the account into an unauthorised overdraft.

Surcharge interest rates applied to unauthorised overdrafts range of 6-9 per cent, on top of regular approved overdraft rates of 10.8-14.2 per cent.

So what happens if a direct debit originator makes a mistake? For example, if a mobile phone company was to charge you for hundreds of hours of calls to Japan that neither you nor anybody else made with your mobile phone?

Or, as in the case outlined below, what if ESB was to use a wildly inflated meter reading when calculating the amount of the direct debit?

If the overcharging caused your account to go into an unauthorised overdraft with the result that your bank levied all kinds of penalty fees and surcharge interest rates, is the direct debit originator liable for these bank charges?

According to the Ombudsman for Credit Institutions, Mr Gerry Murphy, the originating company should pay up.

"If it was shown that there was some cost incurred to the customer as a result of the mistake, then they should be liable," he says.

Once the company admits its error, the sum it credits to your bank account should include both the amount of the overcharging and the amount of any bank charges.

If the mistake has resulted in serious restrictions on your cashflow, there should ideally be some kind of financial compensation for the inconvenience caused.

While your bank may take a dim view of unauthorised overdrafts, your overall credit rating - the record of your credit history held by the Irish Credit Bureau (ICB) and accessible by all credit institutions - will not be affected.

This is because overdraft agreements are not monitored by the ICB unless they are subject to legal proceedings.