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Lloyds Bank ordered to settle two-year-old Section 75 claim involving PayPal - here's how you can fight for a refund too



Lloyds Bank has been ordered by the Financial Ombudsman Service (FOS) to settle a so-called 'Section 75' claim that is almost two-years old after the high-street lender tried to avoid making a payout because the items were bought via PayPal. We have the full details below and what to do if you face similar problems.

Alex Dawson from Monmouth in Wales successfully reclaimed more than £2,000 from the bank for faulty decking purchased on eBay in June and July 2019. The refund came after a long-standing wrangle in which Lloyds initially refused to return the money. Alex was also given £325 in compensation from the bank.

The payout marks a significant win for consumers, with the ability to successfully claim for Section 75 refunds for purchases made through PayPal often being notoriously difficult. So this decision helps to solidify consumers' rights on the issue.

Section 75 rules mean your credit card provider must protect purchases over £100, meaning you could get your money back if there's a problem. But there are grey areas when third party payment providers, such as Paypal, are involved. See our Section 75 claims guide for more on this. 

The FOS ruled that some payments via PayPal ARE protected under Section 75

In Mr Dawson's case, he paid for £2,053-worth of decking using a credit card issued by Lloyds Bank and, although the payment was processed using a 'guest checkout' via PayPal, Mr Dawson was not logged into his personal PayPal account. Lloyds argued that this broke an all-important 'DCS' chain - a link formed between a 'debtor, creditor and supplier' - and that Mr Dawson did not qualify for a refund under Section 75 as a result.

However, the FOS has ruled the other way and made an important distinction between PayPal as an online wallet and payment processor. While using PayPal as an online wallet breaks the link between merchant and seller, this ruling suggests the FOS will view transactions where PayPal is simply a payment processor as valid for Section 75 protection. 

The decision is not legally binding but will likely be used by the FOS and small claims courts to help determine the outcome of similar complaints. The report issued by the FOS to Lloyds Bank is shown below:

My findings

Having considered all the available evidence, I do think Lloyds have acted unfairly in this case. I've explained why below.

Involvement of PayPal

I appreciate that Lloyds have to first consider whether a S.75 claim is valid by establishing the relevant DCS chain when they receive such a claim. But I don't think PayPal's involvement here has broken the relevant chain.

I say this because PayPal have confirmed to our service that when they offer the customer the option of a "guest checkout" they're acting as a payment processor. This means they're simply offering a service to the supplier where they facilitate a payment and the customer isn't required to sign in to their PayPal account for this payment to be successful.

I've reviewed Mr Dawson's PayPal statement from around the time to see if this payment went through his PayPal account in order to eliminate the possibility that he logged in to make the payment. And there's no transactions to Hi Society around the time the payments were made to them. So I'm satisfied that Mr Dawson didn't log in to his PayPal account to make the payment and was more likely to have used the guest checkout facility.

We've considered as a service the role of payment processors/facilitators, and we're satisfied that they don't break the DCS chain, so in this case, I think the evidence supports Mr Dawson in that he does have a valid claim. I've gone on to consider the claim and explained my findings on this below.

The S.75 claim

I've requested evidence from Mr Dawson of the breach of contract he alleges. He's shown me images of the boards he purchased that have broken apart. He states this happened soon after purchase. I don't have an exact date – but I don't think this affects the claim overall. I say this because at this date, we're over two years down the line since purchase and I'd expect decking boards, which are supposed to be able to endure poor weather, to still be in an acceptable condition. Considering Mr Dawson made his claim two years ago, I think its [sic] likely that had Mr Dawson's claim been considered by Lloyds as it should have been, his claim would have been successful. There's enough evidence to show that the boards weren't fit for purpose and this means the contract has been breached.

Under the rules of S.75, the debtor in this type of contract is able to make a like claim against the creditor as they would a supplier – and I think this claim had it been made in a court of law would likely have been successful. So I think Lloyds are responsible for putting things right for Mr Dawson.

Putting things right

In order to put things right, I think Mr Dawson is entitled to a full refund of the goods provided as I'm satisfied he's provided enough evidence to show the boards weren't fit for purpose.

I therefore direct Lloyds to:

  • Rework the credit card account to show the payments in question never existed;
  • Refund Mr Dawson any payments he's made towards the debt, along with 8% simple interest from the date of each payment;
  • Remove any adverse markers on his credit file; and
  • Pay Mr Dawson £100 compensation for the trouble and upset caused, in addition to the £225 already offered (£325 total) – this claim would likely have been resolved two years ago had Lloyds considered the claim when it was brought to them. So I think the delay here has been unnecessary.

What to do if you face similar problems

If you paid for goods or services with a value of over £100 using a credit card but they don't arrive or they're faulty you're legally entitled to launch a Section 75 claim to get your money back as your card provider is jointly liable under the Consumer Rights Act. To launch a Section 75 dispute you must:

  • First log a complaint with your financial provider. Make sure you have your policy or account number to hand, a description of the issue and an outcome you wish to receive. The business needs to give you its 'final response' within eight weeks. You can take advantage of our free Resolver Tool to help draft a complaint or use our Section 75 Refund Letter Template. See more on how to best file a complaint.
  • Already made a complaint? Have your reference number handy if you want to chase it. If you're after an update on an existing case, send an email to quoting your case reference number, or send a direct message on the FOS' social channels, or dedicated contact us page.
  • If the FOS decides the business has done something wrong, it’ll ask it to put things right. The FOS may uphold your complaint and direct the financial firm to pay you compensation for the issue.

If you paid on debit card, or on credit card for an item costing less than £100, and something goes wrong you may be able to claim a refund under similar rules known as chargeback. This is where you ask your bank to reverse the transaction. However, unlike Section 75 this is a customer service promise rather than a legal right so there are no guarantees. For more info and a comparison, see our Section 75 and Chargeback guides.

'An error was made by us'

In response to the FOS investigation, Lloyds told us: "Payments made outside of the PayPal wallet do not add an additional step between the customer and the supplier and therefore do not break the DCS chain, including a customer making payment through a temporary PayPal guest account without logging in to their own PayPal account. In these circumstances, a customer would be able to submit a Section 75 claim for assessment.

"In the case of Mr Dawson, he didn’t use his PayPal wallet when purchasing his goods on eBay and all other Section 75 criteria were met, so we should have accepted his claim. Unfortunately, an error was made by us as we did not agree to refund the claim under Section 75 when we should have."

A spokesperson for PayPal said: "Generally, we believe that where PayPal processes a direct credit card payment from a consumer to a merchant, Section 75 is likely to apply and the buyer may be able to make a claim under it."

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