ByMartin Lewis, Martin Lewis
When your bank takes money from your account without permission, you would call it ‘stealing’. Yet the banks call it ‘setting off’.
If you have a credit card, loan or mortgage with your bank or savings provider, there is a massive hidden danger you need to be wary of. The ‘setting off’ rule means they can take cash from an account to pay off any debts you have with them, without even asking your permission. It is an unpleasant practice that can cause huge problems for those unlucky enough to be affected. The laws covering this are complex, and even some banks have difficulty understanding them.
The banks’ own self-regulating body has warned banks about how they are using setting off. So it is important that everyone knows how it works and how to beat it.
What is the right to set off?
If you owe your bank money, perhaps on a credit card, and you also have an account with it that is in credit, it has the right to simply use that money to pay off the debt. It does not need to ask you. In fact, it does not need to tell you until after it is done. It means people who have money put aside to pay priority debts can suddenly find it has disappeared, and they have no way to recover it.
Some banks put this in their terms and conditions; something like: “The bank may, without notice, set off a debit balance, or debit interest, on an account against any account with a credit balance or credit interest held by the same account.”
Yet even if you don’t find that term in your contract, do not automatically think you are safe. Banks have an automatic right to use the procedure, and do not need to write it into contracts.
When can they use setting off?
While they can use it whenever they want, there are a few conventions they should follow.
● Joint/business accounts. The bank should let you know if they are going to move money between organisations in their group, to or from an account held in joint names, or from business to private accounts.
● The account should not be in dispute. The account shouldn’t be subject to any form of ongoing dispute such as you saying the debt isn’t yours.
● The debt should be a ‘payable on demand’ type. This means it can’t be done on the entire balance of a credit card, but only any missed monthly payment for loans.
The worst thing about it is banks do not have to let you know that they are going to do this in advance. However, they should let you know afterwards.
How big a problem is this?
Banks are starting to use this provision more. Citizens Advice says it has seen an increase of 25 per cent in the number of setting-off enquiries over the past two years. You could argue it is fair; after all, they are owed the money, yet it can cause nightmares.
In the main, the problem is simple: those in financial difficulties are told to focus on making important repayments like mortgages, gas and electricity, yet this takes that power away.
Imagine you have lost your job but have set £800 aside to keep up your mortgage payments, but are struggling to make the minimum repayment on your credit card. The day before the mortgage payment is due the bank takes £300 to pay off your credit card. When the automated monthly mortgage payment can’t go through, you find yourself possibly with bank charges and mortgage arrears, and now your home is under threat.
How to beat the trap
There are a number of simple steps to take:
● Keep debts and savings separate. The obvious answer is to keep your debts and bank account/savings in separate institutions.
Usually it is much easier to move savings than debts. If you are in financial difficulty then try for a Basic Bank Account or check if your local Credit Union offers a current account see www.moneysavingexpert.com/topsavings and www.moneysavingexpert.com/bankaccounts
● Contact your bank asap. If you have missed credit card or loan payments, get in touch with your bank to see if you can make arrangements to get back on track. They should give you a reasonable chance to sort this out.
● Speak to a non-profit debt counselling agency. If it is a severe problem, speak to one of the non-profit debt counselling agencies like Citizens Advice Bureau, National Debtline or the Consumer Credit Counselling Service.
● If it is unfair, go to the Ombudsman. Banks are only supposed to use money from a savings or current account if you have seriously defaulted and not been in touch to discuss how to get back on in control.
If you feel you have been left in the lurch by the bank, and you have complained to no avail, then write to the free Financial Ombudsman Service.
You can’t challenge the fact it used setting-off, as it is perfectly legal, but you can challenge the effect it had on you, and whether you have been ‘treated fairly’ or put in hardship. For a guide to how to make a free complaint, go to www.moneysavingexpert.com/fos