Helen Allingham sat in Wandsworth County Court last week fuming. Her current account had been raided by Barclays Bank, but a judge had just told her their actions were legal. In essence, he confirmed that banks have the right to help themselves to your cash - and there is nothing you can do to stop them.
The process is known as the "right of set off". In simple terms, it gives a bank the power to "combine" your accounts and transfer cash from one in credit to make payments due on another. The Financial Services Authority says: "The right of set off means a bank or building society can combine an account that is in debit with another that is in credit, in effect claiming money from one account to pay a debt in another.
"This could happen if you miss loan or credit card payments and you also have a current or savings account with the bank. A bank can, under certain conditions, then access your account to claim the money you owe."
In Helen Allingham's case, she owed money to Barclaycard so the bank simply helped themselves to the cash in her Barclays current account. But the bank didn't tell her that it was going to do this: "It made it impossible to pay my rent," Helen says.
Her problems began when, through a series of circumstances, she ended up in financial difficulty. She offered to repay Barclaycard £75 a month towards her credit card debt of a few thousand until she was back on a firmer footing but got nowhere. Instead they raided her bank account of hundreds of pounds.
"No bank has the right to raid a citizen's account in the way Barclays raided mine," Helen, a former teacher, says. She also feels the bank's treatment of her was heavy-handed. "The bank and its agents subjected me to telephone calls (up to 10 a day) with some at unsocial hours, as well as sending threatening letters."
She decided enough was enough and to test the bank's actions in court. "It was more a matter of principle than to recover the money they took," she says. "Taking funds from a person's current account should be illegal and unlawful."
Having heard about Helen's case I accompanied her on her day in court. The process is daunting. Apart from all the paperwork and the fee - just £45 for the small claims court - courts can be oppressive places, especially if you're forced to wait around, as we were.
Helen's case was called for 10.15 but it was almost 1pm before a judge was free. Before then Barclay's barrister made several attempts to settle the matter without going into court. The bank was happy to pay all the money Helen demanded - plus costs - as long as she signed a non-disclosure agreement. In other words, it tried to buy her silence.
This is normal for such a relatively small sum, as the bank would rather pay to avoid the additional costs of appearing in court. But to her credit, Helen stood firm and refused the cash. "It's not about the money," she told the lawyer. "It's about my right to be heard about what I consider an injustice."
In court, the judge urged her to reconsider her decision to turn down Barclay's offer. It was clear he was going to find against her. But Helen reiterated how important it was for her to be heard and expose the practice that she finds so wrong. She was one small voice speaking out against the might of the banks and the courts.
Judgment was duly found against her. The right of set off is in included Barclaycard's terms and conditions so the judge had no option but to find in the bank's favour. They legally have a right to snatch cash, if not a moral one. On hearing the judgment the bank's barrister immediately asked for costs to be awarded against Helen, adding another £400 to her growing financial loss.
"Notwithstanding the costs awarded against me (which I am sorry about) I am not sorry that I took the matter to court and that this can now be seen for what it is - a matter of public concern - and will hopefully be addressed by our lawmakers," says Helen. She plans to write to MPs about the issue.
Barclaycard is unrepentant about using the right of set off. It says: "This right is part of our agreement with the customer and they are reminded of our right to set off throughout the collections process."
All banks use it, but claim that it is only sparingly and as a last resort. "It isn't a step we take lightly," says Lloyds. HSBC says: "We only use it when customers are over one month in arrears and have failed to answer our letters or telephone calls."
Santander says: "We have strict criteria and rules for when funds are transferred to pay off a debt and from which accounts we take money." The Nationwide says: "It's only ever used as a last resort as we will always try and work with our members to find an alternative solution that works for both parties."
In fact Nationwide says it gives customers 14 days notice before using the right of set off. That's a massive improvement on how things used to be. In 2004 the Financial Ombusdman wrote: "We would not usually expect a firm to warn customers before it exercises its right of set off. A warning might prompt customers to move their money to an account with a different firm."
Thankfully the City Watchdog has started to make banks act more reasonably if they plan to use set off (see top right). From September they will have to tell customers if set off is being used. More importantly, they will not be allowed to take cash out of people's accounts if it puts them into financial hardship.
But that's not going far enough, says Helen Allingham. "The bank's actions to me were totally unjust," she says. "As a citizen in a democracy I expect things to be fair and reasonable. But what Barclays did is not acceptable. That's why I took them to court and that's why I want things to change."
For Helen the fight continues, but there has been good news for her since she lost the case. After The Independent's intervention, Barclaycard said it wouldn't be enforcing the costs order.
Regulation: Banks must play fair, says watchdog
Banks will have to tell you if they have a right of set-off on your account from September under new guidance introduced by the Financial Services Authority. The City watchdog has already acted on the issue and introduced new rules from 6 March to require banks to ensure that the right to set-off is used fairly.
Under the new rules, if a bank is considering using set-off on your account, it should now:
* Consider each case and estimate how much money needs to be left to meet your priority debts and essential living expenses like mortgage, rent, council tax and food bills;
* Provide a refund, if it becomes apparent to the bank that money taken in set-off was intended for priority debts or essential living costs; and
* Not use set-off on money that it knows or should know is intended for certain purposes, such as where the NHS provided it for healthcare or a third party is entitled to the money. You are also protected under guidelines from the Lending Standards Board, which say that banks should contact you to discuss your options before set-off is used, and to explain when and how set-off can be used; and tell you when set-off has been used for the first time.
From 6 September the rules are tightening. From then banks should provide additional information if they have a right of set-off.
This includes an explanation of the circumstances in which set-off can be used, both before you open an account and when the bank looks to use set-off for the first time. You should also be told each time set-off is used.
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