Regulator challenges “set-off” rule

Court ruling may put an end to banks transferring funds without permission.

set-off ruleLast year I came across the case of a Standard Bank client who had money deducted from his current account to settle his outstanding credit card, without his permission. In this specific case, the client had received money from his father to pay for his studies which Standard Bank immediately transferred, leaving him unable to register for university.

Although Standard Bank agreed to refund a portion of the money, the bank maintained that it had a “common law” right to “set-off” meaning that it is entitled to make use of available funds in a customer’s account to reduce or settle the outstanding balance of another debt owing to the bank.

At the time, the banks and the National Credit Regulator were in dispute as to whether or not the National Credit Act prohibits the application of the common-law principle of set-off. Prior to the implementation of the National Credit Act, which came into effect on 1 June 2007, the banks included a clause when you opened a bank account that allowed them to deduct funds for set-off. This was no longer allowed under the NCA, so the banks no longer insert such a clause in any of their contracts and technically cannot debit an account for a loan repayment unless the customer agreed beforehand. However, the banks continue to apply the common-law principle of set-off on accounts opened after 1 June 2007, despite the provisions in the National Credit Act.

This may all change with the announcement by the National Credit Regulator that it has brought an application against Standard Bank in the North Gauteng High Court to obtain legal clarity on the effect of section 124 of the National Credit Act 34 of 2005 on the common-law set-off.

The NCR is seeking an order from the High Court that the common law set-off has been superseded by section 124 of the NCA.

“This practice [of set-off] 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,” says Nthupang Magolego, Senior Legal Advisor at the NCR.

Standard Bank will be opposing the application, however if the High Court finds in favour of the Regulator, this will be a landmark ruling and banks will no longer be able to transfer funds without client consent.

This article first appeared in City Press.