Right of Set-off & First Right of Appropriation
Right of Set-off
You may have more than one account with your bank or building society, this is not uncommon, for example a current account, a credit card and a loan account. It's also possible that one or more of those accounts are held jointly with someone else, such as your partner or business partner. Consequences can occur if you then miss payments and fall into arrears with one or more of your accounts, as the bank or building society may transfer funds from an account that is in credit to an account that has fallen into arrears. This is referred to as a ‘right of set-off’ and a right to ‘combine accounts’, although this is a right your bank or building society has, there is no duty imposed on them to exercise this right. If they do exercise their right, there are key points they need to consider first:
- They can only transfer money from an account which is in your name to another account in your name, of which you are in arrears, and;
- Both these accounts must be held with the same bank or building society, and;
- The money you owe must be ‘due and payable’. For example, if you’ve only missed one payment on your loan account, only an amount equal to the missed payment can be transferred and not the total balance, provided the loan has not been called in, and;
- Both accounts, the one in arrears and the account which funds are to be transferred from must be held in the same capacity. For example funds cannot be taken from a savings account you hold in your capacity as a treasurer for arrears to one of your personal accounts, such as a personal loan
It is considered good practice for the bank or building society to inform you as soon as it is reasonably possible that they have made a transfer. However it is not reasonable to expect them to warn you they are going to exercise their right, as this is likely to prompt you into moving your funds to a different bank or building society. Opportunity should be given for you to pay your debt before a right of set-off is exercised, but the history of your account will determine if this is reasonable.
It is important to bear in mind that you might have already made a pre-agreement with your bank or building society, for example an agreement that:
- Where your bank or building society’s mortgage arm is a separate legal entity, they will have the right to exercise the right of set-off
- If your current account exceeds a certain amount this will be transferred into your savings account
- When you fall into arrears, funds from an account held by you in a different capacity can be transferred to cover those arrears
Your bank or building society may have included a clause within their terms and conditions informing you that money can be transferred between any account under your name. This is often considered to be an unfair term, and a complaint should be made by you if funds are transferred from a joint account for arrears you have on a sole debt.
Your bank or building society can exercise their right of set-off if:
- Funds from your sole bank accounts are being transferred to debt in your name only
- Funds from your sole bank accounts are being transferred to a debt you have jointly with another person
- Funds from your joint bank accounts are being transferred to a joint debt, provided that the same two people are named on each of the accounts
Your bank or building society cannot exercise their right of set-off if:
- Funds from your joint account are being transferred to a sole debt in your name
- Funds from your joint account are being transferred to another joint account which is held with a different person
First Right of Appropriation
If you know that your accounts are at risk and to avoid any wages or benefits being taken as soon as they have been deposited into your account, you could exercise your ‘first right of appropriation’. This is a temporary measure under common law, allowing you to earmark funds for specific essential bills, for example; your rent, your mortgage, and your gas or electricity.
You will need to put this request in writing to your bank or building society and list the bills you need to be earmarked.
If your bank or building society has already taken funds, leaving you with not enough to cover your essential bills, you should contact them anyway to discuss your circumstances and to request a full or partial refund to cover your essential living costs. If your bank or building society refuses your request, you should make a complaint.
When you make a 'first right of appropriation' request, your bank can make a decision to either freeze your account and/or remove an overdraft facility if you have one. You need to make sure that you can manage either or both of these situations before you make the request.
It is essential to seek assistance with your debts as soon as possible, a debt advice agency will be able to advise you on options and solutions and assist you in drawing up a budget sheet that reflects your personal circumstances and which can be used to negotiate with all of your creditors.
If you are in financial difficulty we recommend that you open a safe bank account to protect your income from being transferred to an account that has fallen into arrears.
If you have an issue with your bank or building society, in the first instance you should make a complaint to them directly in writing, following their complaints process. If you are not happy with their final response you then have the option to escalate the complaint to the Financial Ombudsman Service. Visit www.financial-ombudsman.org.uk