In issue 40 of Ombudsman news (September/October 2004), we looked at cases where a consumer had more than one account with the same bank - and the bank had set off (or combined) the consumer's accounts in order to recover some or all of the money owing on one of the accounts. In certain circumstances, banks have a general legal right to do this - regardless of whether it is specifically provided for in the terms and conditions of the relevant accounts.
When we last wrote about this topic, we were seeing a significant number of complaints where there was some difference in ownership between the two accounts involved in a set off - for example where a bank took funds from a consumer's sole-named savings account to reduce the arrears on a mortgage account the consumer held jointly with another person.
Since then, we have seen some changes in the types of complaint referred to us - reflecting differences in the way some banks are now using set off - as well, perhaps, as the more difficult economic climate. It continues to come as a shock to some consumers that their bank could ever be entitled to "dip into" or " help itself" to their money - whatever the circumstances. But the complaints we receive tend now to centre on whether the bank acted fairly in the way it used the right of set off.
The Banking Code (which covered banking transactions before 1 November 2009) did not include any specific commitment about how banks would use set off. However, it undertook that subscribers to the Code would be sympathetic and positive when considering customers' financial difficulties.
Since 1 November 2009, retail banking has been covered by the conduct of business regime of the Financial Services Authority (FSA). This sets out that banks must provide a service which is prompt, efficient and fair to the customer. The FSA's conduct of business rules also say that banks must pay due regard to the interests of their customers, treat them fairly and, in particular, be fair to customers who are in financial difficulty.
The Lending Standards Board has also recently drawn attention to the importance of using set off fairly.
When considering complaints about set off, we will look at the period leading up to the set off to see what discussion the bank had with its customer about repaying the outstanding debt. As we illustrate in case 84/01, if the bank has taken appropriate action to make the consumer aware of its concerns, and has fairly given the consumer sufficient opportunity to discuss the situation, then we may consider that it acted fairly in setting off the consumer's accounts.
By contrast, in case 84/03 we did not consider that the bank had treated its customer fairly when it twice took money from her current account for a recently-missed loan repayment - without first making any attempt to discuss the situation with her. In doing this, it put her already-stretched budget into disarray. Here, it seemed to us that the bank had unfairly used its right of set off as an informal method of debt collection - with very unhelpful results.
If, in a particular case, we conclude that the bank was entitled to use its right of set off, then we must also be satisfied that it carried out the set off in a fair manner. Case study 84/02 shows the difficulties that can arise when a bank fails to tell the customer what it has done.
Mr and Mrs J complained that their bank had acted unreasonably when "without asking permission or giving any warning", it took money from their savings account to pay off the overdraft on their current account.
The couple had for some time been waiting for their insurance company to pay out on a claim. They had asked for the money they were owed - amounting to just over £5,000 - to be paid direct to their savings account.
As soon as the insurance company confirmed that it had paid in the money, Mr and Mrs J attempted to withdraw it. They said they were "horrified" to discover the bank had already used the money to clear the overdraft on their other account.
The bank turned down their complaint about its actions, so Mr and Mrs J came to us.
complaint not upheld
Evidence supplied by the bank showed that the couple had an agreed overdraft limit of £3,850 on their current account. The bank had allowed them ten temporary increases to this limit over the past two years, to help them avoid charges and additional interest.
It had also written to ask if there was any underlying problem that it could help with. The couple had not responded to this letter - or to several subsequent letters, in which the bank expressed concern about the way in which they were running their current account.
Eventually, the bank wrote to the couple asking them to return their current account to within its agreed limit. By that stage the account was overdrawn by around £5,000. Several weeks later, having had no response, the bank again wrote to Mr and Mrs J. It said that, in the circumstances, it was "not prepared to continue to provide an overdraft facility" and it asked the couple for their "proposals for repaying the overdrawn balance". The bank's records showed that Mr J had phoned shortly after receiving this letter. He had said that "within a few days" he would be able to clear the overdraft (then still around £5,000), as he was expecting "about £6,000" from an insurance claim.
Mr and Mrs J agreed that they had always planned to use the proceeds of their claim to pay off their overdraft. However, they said they had then found they needed some of the money for "other, urgent expenses". They had therefore decided to pay enough into their current account to reduce the amount they owed to just under their overdraft limit. They said they had thought the bank would then offer to reschedule the overdraft, perhaps asking them to pay it off by means of a personal loan.
We noted that both of Mr and Mrs J's accounts remained open, although there was very little money in either of them. The bank had withdrawn the overdraft facility on their current account. We told the couple we did not think the bank had acted unreasonably in doing this, as they had failed to respond to a number of requests to return their current account to within its overdraft limit.
We also said that, in the circumstances, we did not agree that the bank had acted unreasonably when taking money from the couple's saving account to pay off their overdraft. We did not uphold the complaint.
Mr G had a current account and savings account at the same bank. The overdraft facility on his current account was originally £5,000. However, on several occasions over the previous three years the bank had agreed to his request for an increase. He had said he needed the money temporarily while he was waiting for his divorce settlement to be finalised.
When the overdraft reached £40,000, his bank wrote to tell him it would only extend his overdraft facility for a further three months. It said he would then have to repay the money - and it asked him to set out how he proposed to do that.
Mr G wrote back suggesting the bank should reduce his debt to £25,000. He said he would be able to repay that amount, interest-free, by making a lump sum payment of £5,000 followed by monthly payments of £500.
The bank did not respond to that letter. Three months later, it sent Mr G a formal demand for the repayment of his overdraft debt - which then stood at £38,000. At the same time, and without telling Mr G, it transferred £12,000 from his savings account to his current account, to help reduce the overdraft. It also cancelled all the direct debits on his account and stopped his debit card. Mr G only discovered this after his debit card was "swallowed" by a cash machine and he started to receive calls about missed payments from direct-debit mandate holders.
Mr G complained to the bank that it had acted unfairly in "helping itself" to his savings "without warning". He also complained that the bank had caused him considerable difficulty by cancelling his account arrangements. The bank did not uphold his complaint, so Mr G came to us.
complaint upheld in part
The bank provided evidence that, well before it had written asking Mr G for his repayment proposals, it had made clear to him its concerns about the level of his debt. We considered that, in the circumstances, the bank had been entitled to use the balance of his savings account to help repay the long-standing debt.
However, we did not think the bank had handled the situation well. It was unable to explain why it had not responded to Mr G's letter about his plans to repay his debt. If it had contacted him when it received that letter, Mr G would have realised in good time that his proposals were not acceptable.
We also thought that the bank should have told Mr G that it had set off his accounts and cancelled his direct debits and debit card. The bank admitted that its failure to do this had come about because of poor communication between the branch where Mr G's accounts were held and the collections department at the bank's head office. Each assumed the other had written to Mr G to tell him what had happened.
We did not uphold Mr G's complaint that the bank had treated him unfairly in setting off his accounts. However, we said that the bank's administrative failings had caused him some embarrassment and inconvenience. The bank offered to reduce Mr G's debt by £350, in acknowledgement of this. We said this was a fair settlement in the circumstances.
Ms M, who worked as a hospital cleaner, had a current account and a loan with her bank. She complained that the way in which the bank had taken money from her current account for a loan repayment had created a number of difficulties for her. She said it had made it impossible for her to budget effectively. She had been unable to meet some of her other regular payments and had incurred interest and charges.
The difficulties had arisen shortly after she changed employers. Her pay continued to go direct to her current account but the timing and pattern of the payments changed. As a result, there had not been enough money in her current account for her monthly loan repayment to be made on the due date.
Ten days after that payment was due, Ms M's new employer deposited a sum of money in her current account, representing only a part of what she was owed. Shortly afterwards, Ms M checked her account online. She found that the bank had already taken most of that money and used it to pay half of her outstanding loan repayment.
She rang the bank to complain. She said that its actions had made it difficult for her to keep track of her finances and plan her spending. The bank told her it would "make a note" of her "new circumstances".
The following week, Ms M received some back pay from her former employer. Again, on checking her account she found that the bank had already taken most of the sum deposited. It had used it to meet the remainder of her outstanding loan repayment. The bank rejected Ms M's complaint about its actions. It said it had been entitled to take the money for her loan repayment - and that if it had not done this she would have been "in default". She would then have been required to repay the entire balance. Unable to reach agreement with the bank, Ms M came to us.
We looked at the records for Ms M's current account. It was clear that the bank's actions had meant that some of her other commitments - including direct debits and standing orders - had been returned unpaid.
This had resulted in her incurring charges and interest. We accepted Ms M's argument that by taking the money in the way it did, the bank had made it very difficult for her to manage her account. It had also caused her more inconvenience than she might reasonably have expected, when moving to a new employer and a different pay schedule.
We said it would have helped matters if she had contacted the bank before she changed employers, to discuss how the transition to her new pattern of payment could best be managed. But equally, we could see no reason why the bank could not have contacted Ms M to agree a course of action as soon as it became evident that she did not have sufficient funds to meet the loan repayment.
We said the bank had acted unfairly in the way it had set off the accounts. It agreed to cancel the interest and charges that she had incurred on her loan and current accounts, as a result of its actions.
Ms M had already made an additional payment to her loan account - to cover the missing payment. And the bank agreed to alter the date of her monthly loan repayments, to suit her new pattern of pay. The bank also agreed to pay her £250 in recognition of the stress and inconvenience it had caused her.
Mr W had both a savings and a current account with his bank. He had an overdraft limit of £250, but over the previous year had regularly exceeded that limit.
After a payment to his mortgage (held with another lender) resulted in the overdrawn balance on his current account rising to just over £3,000, the bank wrote and asked him to pay money into his account to return it to credit. Mr W did not reply, so the bank sent him a formal demand for the money.
Mr W sent the bank a brief response saying, in effect, that it could take him to court. The bank then used the money in his savings account (just over £600) to reduce the overdrawn balance on his current account.
In response to the bank's letter telling him what it had done, Mr W said it should instead have taken him to court. He complained that it had acted "improperly" in taking the money out of his savings account - and he said he would have moved his savings elsewhere if he had realised the bank might do this.
When the bank rejected Mr W's complaint, he referred the matter to us.
complaint not upheld
The records of Mr W's current account showed that he had for some time been finding it difficult to keep within his overdraft limit, and he regularly exceeded it by a significant amount.
The overdrawn balance on his account rose sharply each month when the bank met the direct debit for his mortgage. However, he normally paid in a sum of money around the same time, to cover that particular payment. The bank had written to Mr W on a number of occasions, making it clear that it was not happy with the way he was managing his account. However, there was no indication that he had made any effort to discuss his position with the bank.
The bank had only set off Mr W's accounts at the point when - on the basis of his response to its formal demand - it had concluded that he would not cooperate in reducing the debt. And it had written to him immediately to tell him what it had done. We concluded that, in the circumstances of this case, the bank had been entitled to set off the accounts and had done so fairly. We did not uphold the complaint.
ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.
The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.