This power is only used rarely, but it is a legal right for a bank to use money from a current account to pay outstanding debts like loans and credit card bills.
Customers can limit the possibility of setting-off by talking to their lender if they feel they are struggling to make payments.
It's also possible to complain if the bank has caused a customer financial harm by exercising their right of offset.
What is setting-off?
Financial institutions have the right to move money around our accounts to pay off outstanding debts.
This is called "setting-off", "right of set off", "right of offset" or "combination of accounts". Whatever a bank refers to it as, the result is the same: they take money from a current account to pay off debts held elsewhere within the same institution.
So, if we fall behind on loan payments or miss a credit card repayment, a bank can theoretically use money from our current account to put towards those debts.
Setting-off only happens rarely, yet it's important to note that banks have an automatic right to "set off" without expressly telling their customers.
Even if the rule isn't mentioned in the terms and conditions of your product, it doesn't make any difference.
The right of offset is included in the Financial Conduct Authority's (FCA) sourcebook of guidance to providers, meaning it is an integral feature of the banking system - even if banks don't invoke the power very often.
When can banks take money to cover debts?
There are various conditions a bank should meet before they can use their right to offset money from a current account to cover other debts.
A bank should:
- Look at whether a customer is in financial difficulties or may be falling into them.
- Leave enough money in the current account to cover reasonable expenses like priority bills.
- Be cautious about setting-off debts when a customer's income comes mainly from state benefits or money needs to be spent on issues like healthcare
In addition, it's important to note that banks do not have to explicitly inform customers when they are about to set-off money from an account.
From the bank's perspective, this makes sense, because it stops customers moving money out of that account, but it's frustrating for customers.
What banks do need to do afterward they have offset money is to tell customers what they have done, although there is no clear timeframe on when they need to do that.
In many cases, customers will figure out something is wrong if there is less money in their account when they try to pay for something or if scheduled payments are rejected.
Setting-off on joint accounts
Joint current accounts and joint debts can complicate matters, with the right to set-off allowed on some occasions and not on others.
- Transfer money from a sole bank account to a debt solely in your name
- Transfer money from a sole bank account to a debt held jointly with someone else
- Transfer money from a joint bank account to pay a debt that is held by both people
However, banks cannot:
- Transfer money from a joint account to a debt solely in one person's name
- Transfer money from a joint account to a joint debt account in another person's name
If banks breach these conditions, it's definitely worth complaining because one person is being penalised for a debt that is legally nothing to do with them.
Will banks reimburse offset funds?
Customers may be able to get a rapid reimbursement of their money if they can prove they are in financial difficulty and that the bank's actions have led to further problems.
This claim is more likely to be successful if customers have missed or might miss priority debts such as:
- Mortgage or rent payments
- Utility bills
- Council tax
- Secure loans
- Child maintenance
It might be much harder to convince a bank that they shouldn't have taken money that might be spent on, for example, a weekly shop because this is a more subjective form of expenditure.
Either way, it's possible to contact a bank and request the money is reimbursed to pay for important outgoings.
If a bank hasn't followed their own guidance discussed above, the money may be reimbursed.
However, customers will still need to engage with their bank about the missed payments, and may be pressed to seek debt advice.
It's also worth noting that banks must take special care with vulnerable customers and those suffering from mental illness to prevent additional harm.
Making a complaint
Customers should first make a formal complaint with their bank, explaining why the right to offset should not have been used.
If that complaint is unsuccessful, customers can escalate their complaint to the Financial Ombudsman Service after eight weeks.
The Financial Ombudsmen Service (FOS) is a free, independent service for banking complaints and the next step for those who feel that the right to set off has been used unfairly.
Although they cannot dispute a bank's right to set off, they can assess the situation and demand money back if they adjudicate that the bank was unfair.
They do this by looking at discussions between the customer and their bank during the period leading up to the set-off to see whether the bank took appropriate action to make the consumer aware that it was concerned about the unpaid debt.
They list several examples of the things they look at on their website:
- Whether a customer was meeting the terms of their account (whether they were up to date with their payments or not)
- Whether the customer had been given a reasonable opportunity to repay (including notifications via letter or offering repayment options)
- Whether the right to offset was provided to the customer in the terms and conditions at least 14 days before the power was used
- Whether the bank's actions put the customers into financial difficulty
For most customers affected by setting-off, this last point is going to be the important one.
The FOS has offered consumers compensation in the past when it found that banks had used the right to set off unfairly by failing to enter into a discussion about the debt payments and caused the customer distress.
Read more about the FOS complaints process on their website.
How to avoid setting-off?
Many of us would be unhappy if money was unexpectedly taken from one account to pay off bills in another, yet it's something we all agree to when we sign up to current accounts and credit agreements with banks.
Although it isn't something that will affect most people, it's worth knowing about in case a bank does invoke this power on our accounts at some point.
There are a number of different ways to avoid being caught out by the right of set-off.
First, it's worth noting that a bank should only take money from a current or savings account if a debt has both severely defaulted and the borrower has made no effort to solve the problem.
The simple act of contacting the bank over a missed payment and working towards a solution should, therefore, mean that it decides against the extreme measure of setting off.
If customers have been communicating with the lender and were nevertheless hit by setting-off, it could well be worth complaining - as detailed above.
Holding debt in a different institution to assets is another simple solution. However, it can be hard to determine exactly what signifies a "separate institution" because some banks are part of larger banking groups who could move money between them.
Remember that it is usually easier to move savings than to move debt.
Make sure to browse around for the top deals and transfer any direct debits over to the new account, many current account providers can do this automatically as part of the Current Account Switch Service.
Summary: Legal right
Banks have the right to take money from our current account to cover other debts such as overdrafts, loans and credit card bills.
There are a few things worth reiterating about the right to set-off:
- It's a power that is only used rarely and is generally a last resort
- Banks don't have to tell you before they take money, but they do have to explain afterwards
- If customers feel the setting-off was unfair they can complain to the bank and then the Financial Ombudsman Service
- The best way to avoid setting-off is to hold your current account and savings in a different bank to debts
Setting-off debts should not be something that banks do lightly and they can be forced to pay compensation if they use these powers inappropriately.
However, this is unlikely to comfort a customer who has woken up one morning to find money has been legally taken from their account.