Protecting Property Rights: Clientèle's Legal Battle Against Debit Order Reversals

Recent court documents have revealed a concerning quadrupling of debit order reversals over a span of six years, prompting the insurance company Clientèle to take legal action against the Payments Association of South Africa (Pasa). The objective is to halt clients from declaring unjustified disputes to reverse their monthly debit orders.

Clientèle contends that the existing rules governing debit order reversals are inconsistent with its constitutional property rights, as many debit orders are being reversed before the company has an opportunity to demonstrate a valid payment mandate from the client.

Earlier this month, the Johannesburg High Court postponed the case, instructing Clientèle to serve papers on the South African Reserve Bank and major commercial banks, affording them an opportunity to oppose the application if they choose to do so.

In the founding affidavit presented before the court, Eben Smit, Clientèle’s head of group legal, highlighted that the number of valid mandates being disputed surged from an average of 2.3% of total monthly debit orders in 2014 to 8.9% in 2020. By December 2020, the reversal ratio had skyrocketed to 13.8%.

This staggering increase translates to a monthly sum ranging between R15 million and R19 million being reversed from Clientèle’s bank account. Notably, the timing of these reversals allows clients to enjoy a month of free coverage.

Smit expressed concern, stating, “The volume of unfounded debit disputes continues to increase steadily.”

Clientèle’s challenge focuses on the constitutionality of clearing rules that permit debit orders to be reversed within 40 days of a dispute being declared. The company has no objection to disputes declared after the 40-day threshold.

Pasa oversees the rules under the National Payments System Act, providing the legal framework for the national payments system, with the rules being binding on Pasa’s member banks.

The matter revolves around two sets of rules: EFT (electronic funds transfer) clearing rules for interbank payments and Naedo (Non-Authenticated Early Debit Order Payment Instructions), where authority for payment is granted through voice, electronic, or written mandates.

In 2021, new rules known as the Authenticated Collections (AC) system were introduced, and the Reserve Bank allowed a migration period for existing mandates to the new system. However, there appears to be uncertainty regarding whether Pasa’s individual member banks are handling disputes under the old or the new system.

The Naedo rules outline four grounds for dispute by an account holder: no authorization for payment, incorrect payment, canceled authorization, or instruction to stop payment by the bank. The rules necessitate immediate refunds to the account holder if a written or electronic dispute statement is received within 40 days of payment.

Similar rules apply to EFT clearing, requiring debit orders to be refunded if disputed within 40 days of payment. If the dispute is declared after 40 days, Clientèle has 30 days to resolve the issue by providing a written mandate from the policyholder.

However, Clientèle contends that the rules do not provide a provision for it to produce a written mandate if a dispute is declared within 40 days. Moreover, there is no provision in the rules for repaying the reversed premium when a valid mandate can be produced. Confirmatory affidavits from other insurers substantiate this common experience across the industry.

Smit argued that the majority of disputes are not genuine, referencing a 2016 statement from the Banking Ombud indicating that 90% of disputed debit orders stem from “cash management” reasons.

He further emphasized, “The volume of debit disputes lodged within 40 days is significant and has been increasing over the past five years due to increased marketing by the banks around the management of debit orders, ultimately resulting in cash management by consumers.”

The surge in disputed debit orders has been facilitated by some banks offering dispute functionality on their websites, enabling consumers to dispute debit orders without visiting a branch, according to Clientèle.

The new AC clearing rules no longer allow policyholders to dispute a valid mandate, a change that is expected to address the issue substantially. However, most debit orders are still processed under the older rules, where disputes can be easily manufactured. Concerns also exist that the new rules may exacerbate the situation by permitting policyholders to dispute payments, potentially going back 365 days.

Clientèle argues that the “immediate reversal” rule concerning disputed debit orders constitutes an arbitrary deprivation of its property. Even if the court determines it is not, the company asserts that it amounts to an invalid exercise of public power, given that Pasa is an organ of the state.

In essence, Clientèle is advocating for a revision of the rules to allow it to validate a policyholder’s mandate before any debit orders are subject to reversal, aiming to safeguard their constitutional property rights and maintain financial stability.