Beware recurring payments and Continuous Payment Authority
Continuous Payment Authorities (CPAs) are a common mechanism used by a variety of businesses to take recurring payments from customers. For example, they are used by many publishers to take annual payments for magazine subscriptions. They are also used by pretty much every payday lender to collect monthly repayments of loans.
CPAs are similar to Direct Debits – as they allow the company to control the amount taken – but CPAs don't have the same guarantees and are set up using a debit or credit card rather than a bank account number and sort code. Some payday lenders even ask for a second card, in case payment from the first is rejected.
And did you know that a CPA allows payments to be taken without needing express authorisation every time?
When CPA goes wrong
On the 28th of September last year a payday loan company called Mr Lender took multiple payments from borrowers after a system error.
A small percentage of borrowers that were in 'repayment plan status' had their debit cards charged multiple times for their next payment instead of just once.
This left borrowers hundreds of pounds out of pocket, with victims not sure who to claim the money back from and what their rights were.
Mr Lender told us the glitch was not directly linked to CPAs as it was a system error that caused the problem. But the CPA setup clearly enabled multiple payments to be taken with no questions asked from the banks.
According to the company, 90% of borrowers received the refund within the first 24 hours. But some unlucky borrowers had to wait for up to four days for their money back.
A spokesperson from Mr Lender claimed it reimbursed anyone that incurred additional costs from the glitch through bank charges, offered a 10% discount on remaining balances and in some cases sent out vouchers as compensation.
The dangers of CPA
Usually a Direct Debit guarantee means you will get refunded by your bank should the bank or company make a mistake. This kind of protection doesn't exist for CPAs.
The Financial Services Authority (FSA) says banks and building societies are required to refund an unauthorised transaction immediately. But in the case of a CPA redress isn't due from the bank and only from the company taking the money.
Una Farrell from the StepChange Debt Charity outlined that the correct procedure would be for the lender to refund a customer within hours, to pay for the charges incurred and for compensation to be available for the stressed caused.
In the case of Mr Lender it did the right thing, although the small percentage that had to wait for three to four days may not agree it was the best response possible.
Other payday lenders have been found to have abused the system by repeatedly requesting money from customers' bank accounts regardless of whether they had attempted to renegotiate payment dates or has other priority debts.
The OFT is currently concluding an investigation into several firms over "aggressive debt collection practices". There is no suggestion that Mr Lender has adopted these practices or is under investigation.
In December, the Office of Fair Trading (OFT) reminded payday lenders that they had to make it clearer to customers that they were signing up to a CPA and how they could cancel it. You can read more on this in Continuous Payment Authority: your rights.
How to cancel a CPA and avoid using one
You can cancel a CPA either by contacting the company taking the payment, or by contacting your bank or card provider; ideally you should do both. The OFT reiterated this last December, saying: "The bank or card provider has no right to insist that you agree this first with the company taking the payments, although it is good practice to also notify the company."
If you'd rather not sign up to a CPA, here are some alternative methods of payment from the StepChange Debt Charity.
- If the company offers Direct Debit, use this instead. Direct Debits are much easier to cancel and if there's an error of any kind the bank should refund you immediately. However, most payday lenders won't offer this option.
- Set up manual payments. Although it requires you to remember to make the payment each month it's much safer.
- Set up a Standing Order. These are easy to set up and cancel. It involves a set amount that can only be altered by you leaving you in complete control.
- Use a prepaid card. These cards can be used for a CPA and can be topped up with the exact amount you need to repay.