During the past week or so I received calls from two people, both of whom had money taken from their bank accounts by their banks to pay off their credit card debt.
Both asked, “Can a bank do this, legally?” and I said, “The short answer is yes.” This practice is known in the trade as “setting-off” and while there are some restrictions it is perfectly legal.
What exactly is setting-off?
Setting off is when a bank uses the money held in one account to pay off a debt in another account held with the same bank.
So for example, if you have an account you pay your utility bills from at the end of each month and your credit card bill, with the same bank, is due a week before, you bank could potentially take money out of this account to pay the bill if there are insufficient funds in your other account to pay for it.
This would be unbeknown to you, as you will not receive notification from the bank in case you move the money away. So the bank takes money from the account to pay the credit card bill and it is no longer there to pay your utilities.
Can I get my money back?
If you’re caught out, as in the above scenario, then you need to contact the bank and ask for your money back but you will need to prove that you suffered as result of the bank’s setting-off.
In the case above the bank has set-off on one account to pay its non-priority, unsecured credit card bill leaving you with no money to pay your priority utility bills, which could also include your mortgage or rent. You will need to send copies of your late payment reminders on any of your priority bills, stating that they were caused by the bank setting off, and demand the bank refunds the money it took under this set-off.
Also, make the point that the bank is to treat you fairly, sympathetically and positively, as required by its banking code.
Why are the banks allowed to do this?
According to the Financial Ombudsman Service (FOS), the right that allows a financial firm to set-off dates back to the 19th century. This entitlement allows the firm to monitor a customer’s financial position and to combine accounts held by that customer, even though this is not detailed in the terms and conditions of any accounts.
The size of the set-off that the bank can take from other accounts must relate to the size of the missed payment. This means the bank can only take money equal to the size of the monthly payment that was due, not the whole loan.
The Lending Standards Board issued minimum standards which came into force on 1 May 2010 covering the use of the right to set-off.
Those customers most likely to be affected by a set-off are those on lower incomes and those struggling with their debts and missing payments on loans or credit card commitments to the bank or institution.
What’s an institution?
Some banks are connected to each other such as Santander, Abbey, Alliance & Leicester and Bradford & Bingley and classed as being under one institute. It is, however, difficult to know exactly who belongs to who. To help you narrow it down, take a look the FSA's list of UK banking and savings groups, it’s not a full list but it gets close.
The bottom line is that accounts with different banks that come under the umbrella of one institution can be raided.
The bank has refused my claim
If 8 weeks passes from the date you raised your complaint about setting off and the bank has not resolved the issue to your satisfaction, then you can go to the Financial Ombudsman Service (FOS). This is a free service and they will investigate your complaint. Contact the FOS online or call 0800 0234 567.
How do I prevent this from happening to me?
Have sufficient funds in your bank account to pay your debts when they are due!
If you can’t do this because you are struggling to meet your bills, including debts, then get professional advice. You may also need to think about getting a new bank account, preferably with a bank or institution that you do not owe money, as this would stop the credit card or loan repayment being taken.
Some people will say you need to pay your debts off using your savings and I can’t really argue with that. Especially since savings offer very little interest at present and credit cards charge massive interest.
Is setting off a big problem?
It has been difficult to establish the exact number of consumers caught out as those affected do not necessarily report it to the FOS when it happens. The FOS has said that they have so far handled over a 1,000 cases - just make sure you are not one of them!
To save any risk of this happening to you keep your finances under control. If you are missing payments and the overdraft, credit cards are maxed out then think about getting professional advice fast. We have a list of very useful contacts.