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Setting-off rules

DON'T bank where you've got debts

Helen Saxon
Helen Saxon
Updated 1 February 2022

What's it called when someone takes cash from your bank account without permission? Most would say it's stealing, but banks call it 'setting-off'. This is a hidden danger for anyone with credit cards, loans or mortgages at the same outfit where they bank or save. Banks can, and do, use your money to repay overdue debts, which can cause financial hell. This guide shows you how to beat it.

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In this guide

While every effort's been made to ensure accuracy, it doesn't constitute legal advice for your circumstances. If you act on it, you acknowledge you do so at your risk. We can't assume responsibility and don't accept liability for any damage or loss.

What does right to 'set off' mean?

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Most banks have the right to transfer cash from your bank or savings accounts to pay off other debts held with them, such as credit cards or loans. It's known as the right to "set off", or to combine accounts.

It WON'T happen to most people, but those struggling financially must be wary and prepare.

Sometimes there will be a term or condition in your contract allowing it to happen, such as the below:

The bank may, without notice, set off a debit balance, or debit interest, on an account against any account with a credit balance or credit interest held by the same account holder.

While any firm can add set-off terms into its contract, in banking and tax there's an automatic right to use the procedure. So it's important to remember...

Checking your bank's terms and conditions won't always help. It often doesn't need to be in there, so you've no way of knowing.

Your bank should let you know if it's going to extend that automatic right, such as moving money between organisations in their group, to/from an account held in joint names, or from business accounts to private accounts. The rules are also slightly different for private banks so in these cases, check the terms and conditions to see what your lender may be entitled to do.

If you owe money, it can also use any cash you've got from reclaiming PPI. If this leaves you in financial hardship, tell the bank and it may change its offer. See how to ask for a refund.

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What is the result of setting-off?

Setting-off could initiate a debt spiral.

Setting-off can cause endless problems – frankly, anything that affects how people budget can have long-term detrimental effects. If you've money set aside to pay for imminent cheques or direct debits from your accounts, but it's taken without notice before, your payments may bounce and you may face bank charges.

Technically, the rules give wide-ranging powers to banks, way beyond just sorting out unpaid accounts. This means if you had a credit card with a bank, owed £1,000, and it decided it wanted to reduce your credit limit to £500, it could take the money from your savings account; though we've not heard of any cases like that. Also remember, if you've debts it's usually worth paying them off with your savings.

You could argue it's fair, they are owed the money after all. Yet it can cause financial nightmares, especially when the money pays non-priority debts instead of priority ones such as rent, mortgage, utilities and council tax.

Here's an example...

Ivor Problem has lost his job. In order to keep the roof over his head, he's put money aside to pay his mortgage and has £800 sitting in his bank account just for that.

Sadly he can't afford to do this AND make the minimum repayment on his credit card, which is unsecured and therefore not a priority.

The day before his mortgage payment goes out, his bank takes £300 to pay his credit card. When the automated monthly mortgage payment comes along... BOUNCE! So now he's in mortgage arrears and his home's under threat.

How to prevent this happening to you

The obvious way to prevent this from happening is to...

Keep your debts and bank account/savings in separate institutions

Usually, it's much easier to move savings than debts; see Top savings accounts for the best rates. If you're in financial difficulty, then try for a basic bank account or check if your local credit union offers a current account.

What's a separate institution?

As many banks are part of mega-conglomerates, it begs the question "what is a separate institution?" The answer depends on the bank's legal entity, something with no easy definition, but generally means how it's registered at Companies House.

This seems to be mostly just the different individual bank brands. For the sake of clarity, these AREN'T always the same as the definitions used for savings safety, but these groupings can be used as a guide.

What are the setting-off rules?

Law.

The source of this law is slightly unclear, though many believe it stems back to a case from the 19th century. Nowadays the rules are in the Lending Code. While this is a voluntary code of practice, most banks subscribe to it, and the rules are binding.

The Code says that, while banks don't have to tell you directly before they are going to do this (in case you move the money out of the account), if they are thinking of taking money, they do have to inform people of the circumstances they can use setting-off rules before doing it.

The bank also needs to:

  • Look into whether you have, or are heading towards, financial difficulties. If you are, it should leave you with enough money to cover reasonable day-to-day living expenses and priority debts such as a mortgage, rent, council tax and food bills.

  • Take special care when it knows your income mainly comes from state benefits, or if expenditure is needed for certain purposes such as healthcare.

  • Let you know after the first time it has taken money (though there's no specified time period that it needs to contact you in).

There are also similar rules under the regulator's Banking: Conduct of Business Regulations (BCOB) you can use to make a complaint if needed.

Do banks reimburse taken money?

If your bank has taken money from you, but hasn't taken the rules into consideration, get in touch straight away and ask for the money back. In most cases, as long as you can show you're in financial difficulty, it should provide a refund. There are two simple steps to follow:

Step 1: Contact your bank

Banks are only supposed to use money from a savings or current account if you've not been in touch to discuss how to get back in control. So don't avoid its letters and calls.

It's important, if you're missing payments, to see if you can sort out with your bank how to get back on track. You should be given a reasonable chance to sort this out.

If you've a severe debt problem, speak to one of the non-profit debt counselling agencies and you may be eligible for 30 days' breathing space with no contact from the bank to chase the debt. You can find a full list of counselling agencies in the Debt help guide.

Contacting your bank really does work, as one site user found a few years ago...

I had a bank account with Barclays and also a credit card with them. I fell behind with the payments after I split with my ex-husband. I work full-time but still struggled. They took all my wages and left me with 46p to last 3 weeks until payday and with 4 children to feed.

I got in touch and they agreed to refund half the money so at least I could buy food and petrol for work.

Financial Ombudsman Service.

Step 2: Complain to the ombudsman

If you feel your bank has left you in the lurch and you've complained to no avail, then make sure you contact the Financial Ombudsman Service.

This is the official independent service for settling disputes between financial companies and their customers. The ombudsman is completely free to use, and will adjudicate on how your complaint should be handled.

While you can't challenge the fact your bank used setting-off, as that's a legal right, the ombudsman will take into account any discussion you've had with your bank about repaying the debt and whether you've 'been treated fairly' or put in hardship due to it.

You can start your claim via the Financial Ombudsman Service website or by calling 0800 0234 567 (or 0300 123 9123 from a mobile). It can take on your case once eight weeks have passed from the date of your first complaint.

For full details on how the ombudsman can help, including free template letters, see the Financial fightback guide.

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