It is a little known fact that banks have the right, under common law, to claim money from your current or savings account to pay off a separate debt. This right to 'set-off ' means a bank can combine an account that is in debit with an account that is in credit, and this may occur, for example, if you miss a mortgage payment and have a savings account with the same bank. Perhaps more worryingly this also applies to joint accounts, so in theory your share of any joint savings could end up being used to pay off the other account holder’s debt.
As set-off is a right under common law banks do not have to include details in their terms and conditions. To protect consumers, and ensure set-off is used fairly, the FSA informed banks that they must adhere to the following new guidelines (Set out in March 2011)
- consider each case and estimate how much money needs to be left to meet priority debts and essential living expenses like mortgage, rent, council tax and food bills
- provide a refund if it becomes apparent to the bank that money taken in set-off was intended for priority debts or essential living costs
- not use set off money that it knows or should know is intended for certain purposes, such as where the NHS provided it for healthcare or a third party is entitled to the money
Consumers are also protected under guidelines from the Lending Standards Board, which say that banks should:
- try to contact the customer to discuss your options before ser-off is used, and to explain when and how set-off can be used
- inform the customer when set-off has been used for the first time
Also according to the FSA website, from 6 September 2011, banks should provide additional information if they have a right of set-off. This includes an explanation of the circumstances in which set-off can be used, both before you open an account (which might be in the terms and conditions of the account) and when the bank looks to use set-off for the first time. You should also be told promptly each time set-off is used on your account.
How to avoid set-off
So be aware, banks have the power to raid your savings account to pay off debts should you get into difficulties. Of course the way to avoid this situation (other than to not get into debt in the first place) is to have your savings and current accounts with different institutions to those which you owe money to (mortgage lender, credit cards etc.). Oh, and be careful who you have a joint savings account with.