Why banks can take your money without asking

Did you know that you banks can take money from your account to settle debts that you haven’t paid regardless of whether you give them permission or not? This is actually legal, thanks to a loophole that the common law principle called ‘set-off’ allows.

You may not know about set-off but it’s just recently come to light because the NCR are taking Standard Bank to task about it. Here’s the technical bit: The National Credit Regulator (NCR) has served Standard Bank with an application for a declaratory order on the effect of section 124 of the National Credit Act (NCA) on the common law rule of set-off to obtain legal clarity. This pertains to the common law rule of set off (see below).

A 2009 consumer information note from the Ombudsman for Banking Services explained that the principle known as set-off is “the bank’s practice of deducting money from a client’s account to pay another account that is in arrears.”

Standard Bank agued: “Our interpretation is that the common law rule of set-off can be applied because section 124 of the National Credit Act does not replace or amend this rule. We are opposing the application.”

Standard Bank and the NCR go to court

In a statement, the NCR explained that it is seeking an order from the High Court stating that the common law set-off has been overruled by section 124 of the NCA.

Nthupang Magolego, senior legal advisor at the NCR, stated: “The typical application of the common law set-off is found in the banking industry where a bank would transfer funds from a consumer’s savings account to settle an outstanding balance on the credit account without the consumer’s authorisation. The consumer’s savings account is debited in order to settle a debt owed under a credit account.

“This practice can put a consumer in financial difficulties since the consumer can be left with little or no money to pay other creditors or meet their living obligations. The position of the NCR is that a bank must obtain the consumer’s authorisation to transfer funds from the consumer’s savings account to settle the debt owed to the bank under a credit agreement.”

Set-off explained

Banks argue that under the set off rule they can take money from your savings and current account to pay off any money owing to the credit facilities that you have with them. They believe that the set off rule enables them to only inform customers about the transaction after the funds have already been removed from their account, as per the Code of Banking Practice. Banks want to take advantage of this rule to prevent customers with prior notification from withdrawing the funds from their account before the bank can apply set-off.

A change in the law

A change with regards to the implementation of the set-off rule came about with the commencement of the National Credit Act (NCA) in June 2007. Prior to this many bank credit contracts included a clause regarding set-off which would allow the bank to apply this principle.

However, with the introduction of the NCA, any loan contracts entered into after 1 June 2007 cannot include a set-off clause. “The NCA further prohibits the bank from debiting an account for a loan repayment unless the customer has agreed beforehand that the account can be debited,” explained the Ombudsman. (This is in line with Section 124 of the NCA.)

While banks have complied in that they no longer include a set-off clause in their contracts (starting from 1 June 2007), they have reportedly continued to apply the principle despite the provisions laid out by the NCA, according to the Ombudsman.

The Ombudsman further elaborated: “The banks obtained legal opinions on this aspect. The legal opinions submitted that the NCA did not in any way prohibit the bank from using the common law principle of set-off. This meant that although the set-off clause is not in the contract the law still permits the bank to use the common law principle for all contracts entered into after 1 June 2007. The NCA does not specifically refer to the common law principle of set-off and does not specifically prohibit it.”

Industry responses

While the court case specifically mentions Standard Bank, this is a banking practice, and therefore other banks can and do apply this principle.

Hannalie Crous, head of retail credit at First National Bank, admitted: “FNB applies the principles of common law set-off in accordance with legal advice obtained. 

“We have only recently been made aware of the National Credit Regulator’s (NCR) application for a declaratory order based upon the interpretation of section 90 and 124 of the National Credit Act. The bank will in due course consider the extent of the potential impact.”

Absa and Nedbank did not comment in time for publication.

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