Banks and building societies will face curbs on dipping into your savings to clear debts, under proposals from industry regulator, the Financial Services Authority (FSA).

Providers will have to leave enough cash to cover essential living costs and they must warn you in advance, under the plans (see the Setting Off guide).

The FSA is consulting on these measures to crackdown on lenders dipping into your current account or savings account at will, known as setting off, which can often leave those in debt even deeper in the mire.

If the plans are ratified, it would represent a victory for our campaign to tighten the setting off rules, which formed part of our '50 Word' Consumer Manifesto last year.

Banks' right to 'set-off'

If you have both debts and savings with one institution, the bank or building society can, under common law, use your cash to repay a loan, credit card or mortgage.

Such transfers usually only happen when you are behind on payments, though not all deposit takers inform you of their right to raid your cash.

Banks and building societies often give no notice, which can completely ruin your budgeting plans and lead to further charges when you miss crucial debt repayments.

Consumer charity Citizens Advice says setting off incidents have increased every year for the past three.

The FSA says this has affected up to 2% of consumers, which equates to hundreds of thousands of people.

The previous Labour Government told last year it planned to investigate providers' setting-off rights.

FSA plans

The proposals aim to ensure banks and building societies:

  • Estimate what the FSA calls a "subsistence balance" to cover basic living costs, and leave at least that amount available to spend after setting off.

  • Inform consumers of their right to set-off "within a reasonable period" before doing so.

  • Provide prompt notification after dipping into your savings.

  • Do not set-off where the debt is held by an individual but their savings are in joint names.

Wendy Alcock, money analyst, says: "It's about time we had a change to the current situation where a bank can take money from a customer's savings account, without warning or permission, to pay off their debt.

"Consumers need to be given control of their finances, rather than banks having carte blanche to do as they please, so we welcome the FSA's consultation."

Avoid setting off

See the Setting Off guide for full steps on how to beat this raid on your cash, but basic tips include:

  • Having debts and savings with different institutions.

  • If behind on debt repayments, speak to your lender to make arrangements to get back on track.

  • If left in the lurch and you've complained to no avail, contact the free Financial Ombudsman Service.

Have your say

If you want to contribute to the consultation, responses must be in by 6 September. See the FSA's consultation paper (chapter 7) for full details.

If ratified, the new guidlines are likely to come into effect late this year or early next year.

Further reading/Key links

Fight back: Reclaim Bank Charges, Setting Off
Have your say: FSA consultation paper (chapter 7)