Richard Catlin | Checkmyfile.com
12 July 2010
Banks are facing a challenge on what they should do before they exercise their right to automatically use funds in a current or savings account to pay off outstanding debts that the same customer holds with them.
Known as a 'right of set-off', this is a remedy available to banks which enables them to transfer any credit balances held in reduction of a debt in the same name.
Right of set-off can be exercised by a bank typically after the debt has been 'called-up', which means that a formal demand for repayment has been sent, or a default notice has been issued. Sometimes, rights of set-off can also be exercised when a customer misses payments on a loan or mortgage, but also holds savings or an in-credit current account with the same company, in the same name, or in the name of one of the joint account holders. In this case, only the amount of the overdue payment should be transferred, and not the whole amount.
The tabloids have been quick to report on proposals put forward by the financial watchdog, the beleaguered FSA, with typically ill-informed gusto - one paper describing it as a "...crackdown on their right to pinch money from savings accounts...", but in reality there isn't anything sneaky or underhand about the practice - when used to pay late loan accounts it can be in the interests of consumers as both interest charges and penalty charges can be avoided.
Where criticism can be levied is where the right of set-off is used to clean out a bank account in full, leaving nothing for the customer to pay for the essentials of life.
In reality, right of set-off is a long established process that in the past has been fully supported by the Financial Ombudsman. Although a framework exists to determine when combining accounts is appropriate, the FSA want this tightened up to protect consumers.
Currently, the lender is not required to inform the borrower that they intend to exercise their right to set-off. After all, most people would move their credit balances quickly if they were put on notice that the balance was about to be seized. Instead, lenders are advised to inform the customer as soon as possible after transferring funds. Lenders are expected to give debtors 'reasonable' opportunity to repay the debt before funds are transferred, but there is no distinct definition of what this is.
The FSA is not looking to remove the right to set-off but instead, it is looking for increased consumer protection, including a prior warning of any transfer of funds before it happens and to ensure that customers aren't left in real financial difficulty due to action.
The FSA is also looking for lenders to provide better information on how the set-off process works, as well as formally including it in their terms and conditions. At present, lenders aren't obliged to do this.
We think the FSA is right to seek that rights of set-off are included and clearly explained in terms and conditions, but its wish that lenders serve notice before doing so is an unrealistic one.
Even if the FSA gets its way, then lenders can always clean out any account in full (where the person has overdue debts to them), without giving notice, and from any bank account, not just one held by the lender, just by getting a county court judgment and then using a Garnishee Order.
Having said that, the right of set-off can be used to obtain repayment of a very old debt. Many people believe that once a debt becomes statute-barred, they are home and dry. In law, the debt is still due, the lender just can't commence legal action to recover it after the limitation period. But it can exercise its right of set-off on any new account monies that comes its way.
If you are concerned about the possibility of having your credit balances seized, there are some simple precautions you can take to minimise the risk.
First, if you start struggling with your bank account, think about having your overdraft consolidated into a loan account with your bank, and arrange to repay it over an affordable period. Then open a new bank account and have your wages or salary paid direct to the new bank account. Don't forget to make a standing order to repay the consolidated loan. If things are already really bad or if your credit standing means that you can't qualify for a conventional bank account, use this no-credit check bank account instead.
Also if you have had a bad debt with a bank many years ago, even if you think the balance was written off, you should not under any circumstances open a new account with them, as you run the risk of having your balance set-off to repay the long outstanding debt.
If you're struggling to make ends meet, you can get advice in our Debt Advice Centre. Whether it's an ongoing worry, or just a short-term blip, you'll find advice on the options open to you, and where best to turn.
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