Setting off to Credit Cards a growing problem

7th September 2010  

High Street Banks are accused by the Citizens Advice Bureau of leaving some customers in “dire poverty” after moving money between their accounts without notice, discussion or permission.

Most ordinary folk would think that if someone took money from their bank account without their express permission, it would be illegal. It appears Banks and Financial Institutions can legally transfer money between different accounts and credit cards belonging to the same person, and only have to tell them afterwards – whether they like it or not.

The procedure, known in the banking industry as “setting off”, usually involves banks doing a balance transfer from a positive balance current account to clear a credit card account which is over its limit, running in arrears or is being operated outside the banks terms and conditions.

The practice is on the increase, and up to 2% of UK bank customers have been affected by setting off; figures show the practice has increased noticeably in recent years. This is partly down to consolidation of the banks after the financial crisis. Where people had accounts with more than one bank, they’re finding these being amalgamated under one single owner.

Many people are aware that NatWest is now part of the RBS group (although still 84% state owned) but there’s also accounts consolidation within the Lloyds TSB banking group which owns Halifax and Bank of Scotland. We’ve been unable to find conclusive evidence of what credit cards are most commonly affected.

The Citizens Advice Bureau says it’s seen an 80% rise in inquiries about such transfers. There are no rules preventing banks operating in this way. They only have to tell the customer after they’ve made the balance transfer.

Sue Edwards from the service said

“It’s actually leaving people in dire poverty. I’d like to see the practice banned, but because it would require Government legislation, it would be tough to achieve.”

In the meantime she is asking banks to leave at least £1,000 in people’s accounts, to cover basic living costs.

“It wouldn’t help everybody,” she says, “but it would help more people than at present.”

The problem is that in these turbulent times, many people’s finances are balanced on a knife edge, and they rely on money they’ve ring-fenced in certain accounts to be there when it comes to paying their mortgage or rent. People on very low incomes are suddenly finding the only money that they have access to has been transferred away, often to settle outstanding credit cards.

Checking your bank’s “Terms & Conditions” seems like sound advice, but we can tell you that it doesn’t have to be outlined there for the banks to carry out the practice. If you’re worried that you could be affected by setting off, you need to ensure that your funds are held in accounts in a combination of differently owned financial institutions.

The Banks say they’re aware of how unpopular the practice is.

“It can be a big challenge for people,” confirms Eric Leenders from the British Bankers’ Association (BBA). He also highlighted that the practice can be helpful to customers who’ve simply forgotten to make a payment.

These customers could avoid a credit card late payment fee, an unarranged overdraft, or arrears on a loan or mortgage.

And he rejected the idea of leaving a minimum of £1,000 in customers’ accounts.

“It would be difficult to say a specific amount,” he says.

However after the BBA published extra guidance to the lending code in March this year, Mr Leenders is promising that banks will be more considerate towards customers.

“The onus is on the banks to make sure they treat individuals sympathetically and positively,” he said.

“Banks should make sure there’s sufficient left for reasonable living expenses.”

The Financial Services Authority, the banking regulator, is currently consulting on its own new guidance on set-off practice.

Among planned recommendations, it says money shouldn’t be taken from joint accounts or where the cash involved has come from a benefit payment or a tax credit.

If you’ve been affected by setting off, and you’ve incurred charges from other financial institutions or, say, utility companies as a result, if you appeal formally to the Financial Ombudsmans Service, you could get the money back if you have proper evidence.

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