Vulnerable hit by banks' set-off abuse

BANKS are taking advantage of vulnerable customers in Scotland by using money in their current accounts to pay off credit card and loan arrears, reports suggest.

• Many of the most vulnerable customers are being hit by banks' use of offsetting Picture: Ian Rutherford

The outcome is often spiralling debt problems and in some cases dire poverty, prompting consumer groups to call on banks to take a fairer approach towards customers struggling with debt.

The use of the right to set-off has become more commonplace during the downturn as people who have lost their jobs or taken pay cuts find it harder for to maintain debt repayments. And as banks step up their cross-selling efforts, meaning more people have debts and current accounts with the same institution, the risk of falling victim to set-off is growing.

Under the right of set-off, banks are allowed to transfer funds from current or savings accounts to cover a customer's credit card or loan arrears. As they don't need the customer's permission, many people only discover set-off has been done when they attempt to take out money or make a payment, only to learn that they have insufficient funds with which to do so.

Citizens Advice has reported an 80 per cent increase in the number of queries regarding set-off in the last four years. It said some vulnerable customers relying on benefits paid into their accounts to cover priority debts such mortgages or rent were unable to pay them as a consequence of setting-off, leading to charges, greater debts and even eviction.

Keith Dryburgh, spokesman for Citizens Advice Scotland (CAS), said offsetting was just another way in which banking policy targets the vulnerable. In cases handled recently by Scottish Citizens Advice Bureaux, people have had their pay or benefit payments removed from accounts, leaving them unable to meet priority debts like mortgages and council tax, said Dryburgh.

"By unilaterally using the right of set-off, banks prioritise payment of a credit card or personal loan debt above more important commitments, where non-payment results in loss of home, disconnection of supply and difficulties affording essentials for clients and their families," he said.

Banks claim the practice helps those in debt because it clears their arrears. But Dryburgh asked why, if they believe the practice is helpful, banks typically do it without telling the customer first.

"We don't see how it can ever be in someone's interests to deprive them of the means of putting food on the table for themselves and their families, or of paying urgent bills like rent or mortgage, and thus putting them in danger of eviction or re-possession," he said.

Individuals should be the ones who decide how to prioritise their finances, he added. "That decision should never be taken by their creditors."

Anecdotal evidence suggests the minimum standards introduced in May by the Lending Standards Board covering the use of the right to set-off have so far made little difference. The standards require banks to ensure a customer's income is only used to repay non-priority debts once provision has been made for priority debts (those where failure to pay could lead to the loss of the customer's home, utility supply and other essential services).

It added: "The subscriber should leave the customer with sufficient money for reasonable day-to-day expenses, taking into account individual circumstances. Subscribers will not subject customers to harassment or undue pressure when discussing their problems."

The Financial Ombudsman Service (FOS) said that, while banks are entitled to use the right of set-off, they are expected to give customers a reasonable opportunity to repay their debts first.

Currently the problem only affects around 2 per cent of bank customers, but this is likely to rise for several reasons. For instance, low interest rates have helped many borrowers in financial difficulties keep on top of their debts in recent months, but that could change when interest rates rise again in what is likely to be an environment of benefit cuts and rising unemployment.

On top of that, many of the big high street banks are currently making a concerted cross-selling push in a bid to get customers taking out as many financial products with them as possible. For instance, some now offer preferential mortgage deals to certain current account customers.

However there is one simple way to avoid falling victim to the practice of set-off. If you have both a current accounts and debts - such as mortgage, credit card or loan repayments - with the same institution, switch to a different current account provider. "This ensures wages and any benefits are not automatically taken out if you have arrears with the same bank where you hold your current account," said Dryburgh.

If your bank has already exercised its right to set-off, however, try to reach a reasonable repayment agreement with your bank. Citizens Advice can help you put your case forward. If that doesn't work you have the right to make a complaint to the FOS.

When dealing with complaints on the issue, the FOS looks at discussions regarding the debt in the period leading up to the set-off. If the bank has taken appropriate action to make the customer aware of its concerns and has provided sufficient opportunity to discuss the situation, it might conclude the bank acted fairly.

However, if this hasn't happened and the bank hasn't made an attempt to discuss the situation, the bank may be viewed as having used its set-off rights unfairly as a form of debt collection.

The Financial Services Authority is currently consulting on proposals to ban banks from taking money from joint accounts or where the money has come from a tax credit or benefit.