banking: firms' right of 'set off'

It is not unusual for a customer to have a current account, a savings account and a credit card account – all with the same bank or building society. The same customer might also have a loan, an ISA and a mortgage with that firm. And some of those accounts might be held jointly with someone else, usually a spouse or business partner.

In this article we look at what the firm can (or should) do where a customer does not have enough money in a particular account to make payments due from that account, but does have sufficient funds in one of their other accounts with the firm.

For example, when an overdraft facility on a current account runs out and the customer fails to pay the amount owed, can the firm take money from the customer’s savings account to reduce or clear the debt? Or, if a customer fails to make credit card or mortgage payments, should the firm use available funds from that customer’s current or savings account to make the missing payments, thereby helping the customer to avoid extra interest or charges?

The basic position is that a firm has a right – but not a duty – to look at a customer’s overall position and to ‘combine’ the accounts held by that customer. This is sometimes called a right of ‘set off’ or a right to ‘combine’ accounts. A firm has this as a general right, whether or not it mentions the right in the account terms. So, in the examples above, the firm can transfer money from an account that is in credit in order to make payments due on another account. But it does not have to do this.

Certain conditions must be met before the firm can exercise its right of ‘set off’.

	The account from which the firm transfers funds must be held by the customer who owes the firm money.
	The account from which the firm transfers the money – and the account from which the money would otherwise have come – must both be held with the same firm.
	The account from which the firm transfers funds – and the account from which the money would otherwise have come – must both be held in the same capacity by the customer concerned. So, for example, if Mrs C holds a savings account in her capacity as treasurer of a local society, the firm cannot take money from that account to pay Mrs C’s personal credit card bill that she normally pays from the current account she holds in a personal capacity.
	The debt must be due and payable. For example, if a customer misses making a loan payment, then (at least until it calls in the loan) the firm can take only the missed payment – not the balance of the loan.

We would not usually expect a firm to warn customers before it exercises its right of ‘set off’. A warning might prompt customers to move their money to an account with a different firm. But we think that it is usually good practice for a firm to tell a customer as soon as possible after it has made a transfer.

We would not generally expect a firm to use ‘set off’ before giving the customer a reasonable opportunity to pay the debt. However, what is ‘reasonable’ might depend on the customer and the history of the account.

The general position can be modified by agreement between the firm and its customer. This might include:

	an agreement that ‘set off’ be available to a firm’s mortgage arm, where it is a separate legal entity;
	an agreement to regularly ‘sweep’ any money over a certain balance out of a current account and into a savings account;
	an agreement that money held by a customer in one capacity can be used to pay debts owed by the same customer in a different capacity.

The following case studies illustrate how this works in practice.

case studies: banking - firms' right of 'set off'

40/1
transfer from joint account to pay debt on sole loan account

Mr G, an elderly widower, needed help with his financial affairs. He decided to make his daughter, Mrs B, a joint account holder on his current account. In that way, she could pay bills for him. It would also be easier for her to tie up his affairs after he died.

Some time later, Mrs B took out a personal loan with the same firm. Her father was quite unaware that she had difficulties paying the monthly instalments, and that the firm eventually called in the loan. Because Mrs B was unable to repay the money, the firm transferred funds into her loan account from the joint account she held with her father.

When she discovered what had happened, Mrs B was extremely upset because it meant that she had to tell her father about her financial problems. This was not only an embarrassment for her – it became a serious worry for her father.

When she complained, the firm defended its actions, telling her that the terms and conditions of the joint account allowed it to transfer the funds from the joint account. Unhappy with this, Mrs B then brought her complaint to us.

complaint upheld
The edition of the terms and conditions that the firm referred to was the most recent version. It had been issued some years after Mr G had opened his current account – after Mrs B had become a joint account holder and after Mrs B had taken out the loan.

Mrs B did not recall seeing the leaflet containing the updated terms and conditions. However, she accepted that she might well have received a copy as part of a regular mailing from the firm – probably with her monthly statement.

We noted from the latest version of the terms and conditions that there was a term allowing the firm to take money from the joint account to pay debts owed solely by Mr G or by Mrs B, as well as to pay debts owed by them jointly. However, we thought that this was such a radical departure from the normal position that it was an ‘unusual’ term. It was also an ‘onerous’ term, because its effect was to make Mr G liable for Mrs B’s debts.

A firm can only rely on terms that are ‘unusual’ and ‘onerous’ if they have been brought fairly to the customer’s attention. The Banking Code says that customers must be given personal notice of any terms that are to their disadvantage. We did not think it enough for a firm simply to include the revised edition of the account terms when it sent out routine statements to its customers, which is what had happened here.

We also thought that the term was ‘unfair’ within the meaning of the Unfair Terms in Consumer Contracts Regulations 1999. This was because it created a significant imbalance in the parties’ rights and obligations, to the detriment of customers. Specifically, it had the effect of making Mr G a guarantor of Mrs B’s debts – but without giving him the information that a guarantor should usually be given.

We told the firm to transfer the money back to the joint account – leaving it to find other ways of recovering the money that Mrs B still owed.

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40/2
transfer from savings account to daughter’s credit card account

Mrs J had a current account and a savings account with the firm, as well as a credit card account. She was also an 'additional cardholder' on the credit card that her daughter had with the same firm.

Mrs J decided to set up a standing order to pay £100 a month from her current account into her credit card account. Unfortunately, a mistake by the firm resulted in the money going instead to her daughter’s credit card account.

Then because no payments were being made into Mrs J’s credit card account, the firm decided to transfer money into that card account from her savings account. When the firm refused to uphold her complaint about this, Mrs J came to us.

complaint upheld in part
Mrs J had not paid the bill for her credit card. The card was issued by the firm and held by Mrs J in a personal capacity. She held a savings account with the firm, also in a personal capacity. So the firm could use money from Mrs J’s savings account to pay her card bills.

However, it was clear that if the firm had set up the standing order correctly in the first place, there would have been no arrears. And Mrs J was not liable for her daughter’s card bills, even though she was an additional cardholder. So we told the firm to reverse the entries and to make any necessary adjustments to the interest and charges that Mrs J had been asked to pay.

Mrs J’s daughter remained liable to pay her own credit card bill.

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40/3
transfer from sole savings account to pay arrears on joint mortgage

Mr D and Miss T had a joint mortgage with the firm. Mr D also had a savings account with the same firm. He was often a few weeks late in making his mortgage payments and, on a number of occasions, he had to pay fees for being in arrears.

A couple of weeks before the couple were due to go on holiday, Mr D visited his local branch of the firm. He intended to withdraw some money from his savings account in order to pay a few bills and get some spending money for his holiday.

However, he was very shocked to find that the balance on his savings account had been reduced almost to nothing. The firm had transferred most of his savings to pay the arrears on his and Miss T’s mortgage.

complaint rejected
The mortgage was held on a ‘joint and several’ basis. That meant that Mr D and Miss T were both liable to make payments on it – both individually and together. So, Mr D did owe the mortgage arrears to the firm.

Mr D held the savings account in a personal capacity. So the firm could transfer money from Mr D’s savings account to pay the arrears he owed on the mortgage. It did not matter that Miss T also owed those arrears, because that did not make any difference to Mr D’s liability for them. We therefore rejected the complaint.

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