Banking Ombudsman slams 'heartless' practice

08 October, 2008

The Banking Ombudsman says that it has come to the attention of his office that certain banks have been applying the legal principle of set-off in a morally repugnant manner causing severe hardship to individual customers.

We have received complaints of banks appropriating customers' entire salaries in some instances. This effectively leaves the customer penniless and unable to meet his/her basic needs for the rest of the month. In addition, this practice of attaching an entire salary, has a "snowball" effect in the sense that the bank customer is then unable to make payments on other debts and incurs severe penalties, for example for returned debit orders.

The cumulative effect of all of this is simply to cause the customer to sink deeper into the financial quagmire. We have recommended to the banks that they refund the amounts deducted and limit themselves to deducting a reasonable amount. We have recommended to the banks concerned not to attach entire salaries but to evaluate each case on it's particular set of circumstances to determine what a fair and reasonable amount to be deducted, would be.

The legal principle of set-off allows a bank to appropriate funds in a customer's cheque or savings account to extinguish in full or in part the debt owed by that customer on his credit card or personal loan.

Whilst this practice is permissible, it is the manner in which it is being applied that has raised the hackles of the Ombudsman. The National Credit Act explicitly prohibits banks from inserting a clause permitting them to apply set-off in their agreements with their clients, save in very specific circumstances. The Act applies to all accounts opened / agreements entered into, after the 1st June 2007.

Whilst the banks have complied with this restriction by not including a "set-off" clause in their contracts entered into with clients after the 1st June 2007, they still continuing to apply set-off.

The banks argue that the National Credit Act does not prohibit the common law principle of Set-Off from being applied. The Banking Ombudsman is critical of this approach as it clearly violates the spirit and the letter of the National Credit Act, questions of whether the credit was granted prudently in the first place, aside. The Banking Ombudsman also strongly advises bank clients to negotiate a re-payment plan with their banks in respect of outstanding debt so as to prevent the bank from applying set-off.

The Ombudsman for Banking Services is a free dispute resolving service to all bank customers, and we encourage customers that have lodged complaints with their banks and are not happy with the outcome to approach the office.