Banks' Rights - Is Your Money Safe?

Nowadays, after all the additional selling targets set for bank staff, 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; after all, you trust them to do the right thing by you, don't you? The same customer might also have a loan, an ISA and a mortgage with that bank or building society. Many of those accounts might be held jointly with someone else, usually a spouse or business partner.

Quite reasonably, your bank or building society is likely to be the first place you will visit to sort out your financial requirements.

In this article we look at one of the most commonly asked questions seen by the Advisor Team at National Money Helpline when dealing with individuals' debt problems:

What can the bank or building society 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 that bank?

A typical scenario:

When an overdraft facility on a current account runs out, or the customer takes more out of the account than covered by the overdraft and slips into default, and the customer fails to pay off the amount owed.

Can the bank 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, could the bank 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 bank or building society 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. The bank or building society has this as a general right, whether or not it mentions that right in the account terms & conditions. So, in the examples above, the bank can transfer money from an account that is in credit in order to make payments due on another account, but is not required to do so.

Before the bank can exercise its right of 'set off' it will have to meet certain conditions:

*The account from which the funds are transferred must be held by the customer who owes the bank money.
* The account from which the money is transferred - and the account from which the money would otherwise have come - must both be held with the same bank/building society.
* The account from which the bank/building society 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 Mr J holds a savings account in his capacity as treasurer of a local society, the bank cannot take money from that account to pay his personal credit card bill that he normally pays from the current account he 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 the lender formally demands full repayment of the loan after default) the bank can take only the missed payment - not the balance of the loan.

It would be rare that a bank warns customers before it exercises its right of 'set off'; after all a warning might prompt customers to move their money to an account with a different bank or into someone else's name! However it is usually good practice for a bank to tell a customer as soon as possible after it has made a transfer, though of course this is too late to discuss the position with the bank and come to some alternative arrangement.

Similarly, it would be unusual for the bank/building society to use 'set off' before giving the customer a reasonable opportunity to pay the debt - what is 'reasonable' though is likely to depend on the customer and the manner of conduct of the account in the past. Constant problems are likely to reduce considerably the timescale defined as 'reasonable'!\

The above general position can be modified by agreement between the bank/building society 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 transfer any money over a certain balance out of a current account and into a savings account (typically at the end of each day);
* 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.

Such arrangements will have to be specifically agreed, and it is important that any document produced by the lender where for example, a mortgage has been agreed, is fully understood before signing it, as there could be a clause included which enables the lender to exercise set off in certain circumstances.

You could be forgiven for interpreting the above as a demonstration of 'good customer service' and an example of 'treating customers fairly'. However, the reality is that banks etc will be looking to minimise their risk of losing money, and will exercise their 'right' of set off fairly aggressively where they see funds in the same name on other accounts.

Finally, keep in mind that this 'right' is not restricted to setting off current balances. For example, a bank is perfectly entitled to retain any funds paid into an overdrawn account (from, for example salary) in order to reduce the indebtedness, provided that the overdraft facility has expired or the account has been defaulted by the bank. This could mean that the individual has no money to cover living expenses until the next pay day. Similarly, such funds paid into a current account can be used to partially or fully repay a defaulted loan account, with the same result for the customer.

Christian Seanor, one of National Money Helpline's specialist advisory team, explains that "clients often fail to realise that they risk the bank taking their funds to clear outstanding debts in default if they continue to pay into their bank account. We have seen several instances where clients have experienced financial difficulties where they have not made alternative arrangements in respect of their salaries. It is really important that, in such situations, individuals protect themselves by setting up a separate bank account where they have no debts, which they maintain in credit, whilst putting in place arrangements to clear the outstanding debt(s) within their means."

National Money Helpline has over 30 years experience of financial matters, professional experts and proven results in resolving problems with debt - check them out at [http://www.nationalmoneyhelpline.co.uk].

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