Tweet
7
Introduction
In this chapter we propose amending the Banking Conduct of 7.1 Business sourcebook
(BCOBS), to provide guidance in relation to exercising a right of set-off on retail
consumer accounts. We are extending the guidance to make reference to set-off in
BCOBS 4.1 (The appropriate information rule), and adding further guidance about
using set-off in BCOBS 5.1 (Post-sale requirements). We are also consulting on a minor
amendment to the BCOBS guidance relating to information about compensation
arrangements. This is a minor drafting change, and not a change in policy.
7.2 Our powers to give guidance, and the processes we must follow, are set out in
FSMA. The relevant sections are 155 and 157. These proposals will be of relevance
to banks, building societies and credit unions. They will also be of relevance to
consumer groups.
Background
7.3 In principle, under the common law of banking, a banker has the right of set-off
(sometimes called a right to combine accounts). This means that a bank may (but is
not obliged to) combine an account in debit against another account in credit and be
liable only for the balance.
7.4 The right of set-off falls within our remit on the deposit-taking side, with the
consumer credit aspects falling under the remit of the Office of Fair Trading (OFT).
The Lending Code, which is a voluntary code of practice for the industry, includes
guidance on using set-off and is monitored and enforced by the Lending Standards
Board. We believe set-off is covered within our high level principles and rules;
however, we think it would be helpful to set out in guidance in BCOBS what we
expect from firms regarding their use of set-off.
7.5 We recognised that set-off, affecting accounts within our scope, was potentially a
concern during 2009 when we were developing the banking conduct regime. This led
to us including a Q&A about set-off rights in the Moneymadeclear guide, Just the
facts about your bank account.17
17 http://www.moneymadeclear.org.uk/pdf...nk_account.pdf
Financial Services Authority 43
7.6 We understand that only a minority of customers are affected by set-off. Firms vary
in the frequency of their use of set-off – some use set-off relatively often, affecting
approximately 1–2% of all their customers, and others use set-off rarely. From
discussions with banks and building societies we also understand that set-off is
sometimes used in situations where some customers may regard it as a benefit, such
as when they have missed a credit card payment in error rather than due to
difficulties with meeting payments.
7.7 However, we have some evidence that consumer knowledge of the right of set-off is
low. We also have evidence that the use of set-off can be of significant detriment to
consumers if it causes them to struggle to meet their priority payments and living
costs. Citizens Advice Bureau (CAB) and Money Advice Trust have provided us with
a number of recent case studies that demonstrate the negative effects that the use of
set-off can have on consumers when it appears to have been used unfairly. In many
of the case studies, it seems that the consumer had no knowledge of the right of
set-off before it was used on their account. It also seems that in some instances, the
bank or building society had not left the consumer with enough money to meet their
priority payments and essential living costs. For example, some consumers were
unable to pay their mortgage or rent due to their bank or building society as a result
of set-off being applied to their accounts.
7.8 Problems presented by use of the right of set-off appear to be on the increase.
Citizens Advice has told us that the number of problems with set off dealt with by
Citizens Advice Bureaux in England and Wales has increased year on year over the
last three years. We also have evidence from some large retail banks that their use
of set-off has increased in the last year.
7.9 Taking the above factors into account, we have decided to consult on guidance for
firms in relation to their right of set-off, which we think will help to clarify how
customers should be treated fairly.
7.10 This chapter includes proposals on adding guidance to BCOBS regarding:
• the information that should be provided to customers before and after set-off
is used;
• how set-off payments should be determined; and
• the types of accounts that set-off should not normally be used on.
Proposed amendments
Appropriate information
7.11 We propose adding guidance to BCOBS 4.1 (as BCOBS 4.1.4AG(2)(a)), stating
that, to comply with the appropriate information rule, the firm should provide an
explanation to its retail customers of the nature and extent of the firm’s right of
set-off in good time before the consumer is bound by the contract for the retail
banking service. This information may be incorporated in the terms and conditions
that apply to the contract for the retail banking service.
44 CP10/15: Quarterly CP (July 2010)
7.12 Having gathered questionnaire responses from a selection of firms and after
discussing the subject with consumer agencies, we think that appropriate information
in the context of set-off means that, as a minimum, the information should be set out
in the account terms and conditions. This means that information about set-off
would be provided along with other details about the rights and obligations of the
customer, and also means that customer would have information about set-off that
they can refer to should the need arise. We have considered whether we should go
further by proposing that information about the right of set-off should be provided in
the pre-contract information separately from the terms and conditions. However, we
do not believe that doing so would provide additional benefits for most consumers.
7.13 Our reasoning is that requiring disclosure of set-off as part of the sales process
seems disproportionate and risks overloading consumers with too much information.
In addition, such a proposal would not directly benefit existing account holders, and
the impact on new account holders would be limited if set-off was applied a
significant amount of time after the account was opened.
Q21: Do you agree with our proposal that information
about set-off should be provided in the account
terms and conditions?
Q22: Do you see a need for further information, beyond
that set out in our proposal, to be provided about
set-off when a customer opens an account?
7.14 We also propose adding guidance to BCOBS 4.1 (as BCOBS 4.1.4AG(2)(b)), stating
that where a firm knows or reasonably ought to know that the consumer is beginning
or continuing to experience difficulties in meeting their payment obligations, the firm
should provide general information in relation to the nature of the firm’s right of
set-off, as well as the generic circumstances in which the firm may rely on that right,
within a reasonable period before the firm seeks to exercise its right of set-off. This
information may be communicated in a standard form of words and may be
incorporated in another communication sent by the firm to the consumer.
7.15 This does not mean the customer should be given specific notice that set-off will be
used on their account. Instead, customers should be given general information about
the right of set-off.
Q23: Do you agree with our proposal for firms informing
customers of the right of set-off when they are
beginning or continuing to experience difficulty in
meeting their payment obligations?
7.16 Finally, we propose inserting guidance to BCOBS 4.1 (as BCOBS 4.1.4AG(2)(c)),
stating that where a firm has exercised a right of set-off, it should provide prompt
notification of this to the consumer. This notification should clearly identify the date
that the firm exercised its right of set-off and the amount debited from the
consumer’s account in reliance on that right.
Financial Services Authority 45
Q24: Do you agree with our proposal that customers
should be promptly notified about the use of
set-off on their account?
Post-sale requirements
7.17 We propose adding to the guidance in BCOBS 5.1 (Post-sale requirements),
explaining banks’ responsibilities under Principle 6 (a firm must pay due regard to
the interests of its customers and treat them fairly) and BCOBS 5.1.1R. As far as is
practical, firms should review the information that is available and accessible to
them, relating to the consumer’s account, on an individual basis, and estimate the
amount of any ‘subsistence balance’.
7.18 We have defined subsistence balance as any sum of money payable by a firm to a
consumer or standing to the credit of the consumer in an account with the firm
where that sum is needed by the consumer to meet essential living expenses or
priority debts (whether owed to the firm or a third party).
Essential living costs – these include costs such as housekeeping, transport, and
health and social care payments. They will be difficult to determine in the case
of some customers, so we think it will be sufficient for firms to make reasonable
estimates about the amount required for a customer’s subsistence balance.
Priority debts – where non-payment can result in consumers being imprisoned,
losing their home or losing their essential goods and services. These include
mortgage/rent payments, utility bills and council tax.
Q25: Do you agree with our proposals for exercising the
right of set-off fairly?
Q26: Do you have any suggestions of other ways of
exercising the right of set-off fairly?
7.19 We also propose adding to the guidance in BCOBS 5.1, stating that firms should not
set off as far as practicable:
• any debt due solely from a consumer, or any debit balance on an account held in
the sole name of a consumer, against (or with) any sum of money payable by the
firm to that consumer and another person jointly or any credit balance on an
account held in the joint names of that consumer and another person;
• any debt due from, or a debit balance on an account held by, a consumer in a
personal capacity against (or with) any sum of money payable by the firm to the
consumer or standing to the credit of the consumer in an account held with the
firm, where the firm knows or reasonably ought to know that:
(i) a third party is beneficially entitled to that money or that the consumer is a
fiduciary in respect of that money; or
(ii) the consumer has received that money from a government department or
local authority for a specific purpose or is under a legal obligation to a third
party to retain and deal with that money in a particular way.
46 CP10/15: Quarterly CP (July 2010)
Q27: Do you agree with our proposal that firms should not
use set-off in the types of scenarios listed above?
7.20 We propose exempting credit unions from the proposals relating to the post-sale
period. There is a customised statutory regime for credit unions in the Industrial
and Provident Societies Act 1965 and Credit Unions Act 1979 – s.22 of the
1965 Act states:
“A registered society shall have a lien on the shares of any member for any debt due
to the society by that member, and may set off any sum credited to the member on
those shares in or towards the payment of that debt.”
On the basis that the exercise of set-off for credit unions is provided for in specific
legislation, we do not consider it to be appropriate to subject credit unions to
our post-sale proposals. However, we propose that the guidance on providing
appropriate information about set-off should apply, in the interests of transparency
and enabling credit union customers to make decisions on an informed basis.
Q28: Do you agree with our proposal to apply the guidance
in the information requirements to credit unions, but
exempt them from our post-sale guidance on set-off?
7.21 As we are consulting on guidance intended to illuminate existing rules rather than
making new rules, we do not propose a transitional period.
Q29: Do you agree that our proposed guidance should take
effect immediately?
Information about compensation arrangements
7.22 We are also using this opportunity to consult on a minor amendment to the text in
BCOBS referring to information about compensation arrangements. BCOBS 4.1.4G
sets out the type of information that should be provided or made available to a
banking customer in order meet the requirements of the appropriate information rule
(4.1.1R). With the commencement of COMP 16 on 1 January 2010, we altered the
reference in BCOBS 4.1.4G(8), to read ‘information about compensation arrangements
in accordance with COMP 16’. COMP 16 sets out the information about
compensation that relevant firms must disclose, how frequently that information
should be disclosed and the methods of communication that should be used.
7.23 In order to clarify our expectations, and to reduce cross-references in the Handbook,
we propose to amend 4.1.4G(8) to instead read “the terms of any compensation
scheme if the firm cannot meet its obligations in respect of the retail banking
service”. This does not represent a change in policy or interpretation, and there are
therefore no additional costs or benefits associated with this clarification.
Q30: Do you have any comments on our proposed
amendment to BCOBS 4.1.4G(8)?
Financial Services Authority 47
Cost-benefit analysis
7.24 Banks, building societies and credit unions will be affected by our proposals relating
to set-off. We estimate up to 387 banks and building societies, which are FSA/ EEA
authorised firms, and 494 credit unions may be affected.18
7.25 To assess the impact on firms, we sent a questionnaire to a sample of banks and
building societies, asking them to estimate the potential costs arising from our
proposals. We received eight responses: six banks and two building societies.
7.26 Respondents represent approximately 55% of the personal current account market.
Respondents varied in the frequency of their use of set-off; some made relatively
high numbers of set-off transactions (1–2% of all their customers were affected),
and others used set-off rarely.
Direct costs to the FSA
7.27 The proposals will result in minimal incremental costs to the FSA. Supervisors will
take account of the new guidance within their existing supervisory approach.
Appropriate information
Adding guidance in BCOBS regarding the information that should be provided to
customers before and after set-off is used
Compliance cost
7.28 In summary, most respondents thought that significant incremental costs or benefits
were unlikely to result from our proposals to add guidance to BCOBS regarding the
information that should be provided to customers before and after set-off is used
(paragraphs 7.11 – 7.16).
7.29 Most respondents stated that they already include information about set-off in
account terms and conditions. One respondent indicated that it does not include
information about set-off in the account terms and conditions. For this firm and any
other firms who are currently not including information about set-off in the account
terms and conditions, potential costs of this proposal would be the one-off costs of
legal review and documentation re-print. One respondent indicated that one-off
reprinting costs could be around Ł30,000 per firm but noted that these costs would
be minimal if sufficient time were given to run down stocks.
7.30 Most respondents stated that they either do notify customers of the right of set-off
before it is used on their account (where the customer has missed credit repayments),
or they are planning to introduce this practice shortly. One respondent (with fewer
than ten set-off transactions per year) commented that they only use set-off at the
end of a banking relationship with a customer. We are following up on this to obtain
more information. We think overall that the costs of this proposal will be minimal.
18 This figure is calculated from the number of firms with the regulated permission for ‘deposit taking’, taken from the
FSA’s register as of 31 March 2010.
48 CP10/15: Quarterly CP (July 2010)
7.31 All respondents stated that they do provide customers with prompt notification of
set-off, and include the figure in customer statements, so again we believe the costs
of this proposal will be minimal.
Benefits
7.32 Our proposed guidance on providing appropriate information about set-off in
account terms and conditions increases transparency about set-off for all consumers
opening accounts, as consumers will be provided with relevant information to which
they can refer at a later date. This may help to empower some consumers and result
in some people managing their accounts on a more informed basis.
7.33 Firms providing information to customers about set-off when they get into payment
difficulties could encourage some customers to contact their bank or building society
and then work to agree a way forward.
7.34 Some customers might be clearer about their financial position and so should be
in a better position to organise their finances as a result of firms providing prompt
notification of the use of set-off.
7.35 However, based on our research on consumer behaviour in financial markets,19 we
acknowledge that significant incremental benefits may not result from our proposals.
The benefits will depend on the number of consumers that are likely to act on the
information provided before and after set-off is used; this number may not be high.
Post-sale requirements
Adding guidance in BCOBS regarding how set-off payments should be determined
Compliance cost
7.36 In summary, most respondents thought that significant incremental costs were
unlikely to result from our proposals of adding guidance in BCOBS regarding the
post sale requirements (paragraphs 7.17 – 7.18). However, some firms will be
affected by the proposals and thus we expect that some firms will incur costs in the
amount of Ł3million to Ł4 million per year.
7.37 The majority of respondents say they already consider customers on an individual
basis, leaving them with enough money to meet their priority debts and essential
living costs. So for these firms, we think the costs of this proposal will be minimal.
7.38 However, the questionnaire also suggests that some firms may need to adjust their
practices in the light of the proposed guidance, in order to proactively consider
customers on an individual basis.
7.39 It was indicated that a basic assessment to identify whether a customer is in payment
difficulties, and estimate the amount needed to meet priority debts and essential living
costs, would take around 10–12 minutes per customer. Most of this additional work
will be done by administrator-level employees whose hourly rate has been estimated
19 http://www.fsa.gov.uk/pubs/consumer-research/crpr69.pdf
Financial Services Authority 49
at Ł10 (i.e. average Ł16,000 p.a.) including a standard overhead of 30% in
accordance with the Standard Cost Model (SCM).20 Therefore, we estimate the
incremental cost to firms to be Ł1.50–2.00 per customer. Given the data obtained
from firms’ responses to the questionnaire, we think approximately two million
set-off transactions would be affected. So, as a result of this proposal, the overall
costs to these firms will be in the region of Ł3–4 million per year. However, these
estimates represent an upper bound for compliance costs as firms are expected to
introduce cost efficient ways to deal with the issue.
Benefits
7.40 The benefit of firms leaving customers with enough money to meet their priority
payments and essential living costs will be that some customers may avoid getting
into more serious difficulties, due to being unable to pay their rent/mortgage and
other key expenses. It should also result in a smaller likelihood that customers and
any dependents will be left without enough money to live on and resort to some
type of short-term emergency finance. Finally, it should also limit the possible
intangible negative effects of set-off transactions (for example, the disruptive effect
of having to unexpectedly renegotiate other payments).
7.41 The tangible benefits are potential savings for consumers from avoiding costs associated
with having to resort to some type of short-term emergency finance and/or being
unable to pay their rent/mortgage and other key expenses. From the questionnaire, it
was estimated that a typical set-off is between Ł100 and Ł200 per transaction. From an
informal survey of short-term lenders currently active in the market, we estimate the
average interest rate charged on short-term loans is around 300–400% per year. Thus,
the cost of short-term lending to cover a typical set-off transaction of Ł100–200 will be
between Ł25 and Ł60 per month. In addition, there are potentially other costs that a
customer would incur due to being unable to pay their rent/mortgage and other key
expenses. For example, mortgage arrears charges vary between Ł30 and Ł50 with an
average arrears charge of Ł40 per month.21 Therefore, we estimate that a typical benefit
of firms leaving customers with enough money to meet their priority payments and
essential living costs will vary between Ł65 and Ł100.
7.42 If the number of set-off transactions per year that fail to meet the required standards
of fairness is 30,000–60,000 or more (which represents between 1.5% and 3% of
approximately 2 million set-off transactions that would be affected), this would
exceed the expected compliance costs resulting from these proposals (Ł3–4 million,
see paragraph 7.39). Based on our supervisory experience, number of set-off
transactions that are not currently in line with the requirements of BCOBS
and the Principles for Businesses is likely to be at least equal to this figure.
20 Real Assurance 2006 study on administrative burdens.
21 See FSA CP10/2 “Mortgage Market Review: Arrears and Approved Persons”
50 CP10/15: Quarterly CP (July 2010)
Adding guidance to BCOBS regarding types of accounts on which set off should not
be used
Compliance cost
7.43 The majority of respondents do not use set-off on any of the types of accounts we
have identified above (paragraph 7.19). For these respondents, the costs of this
proposal will be minimal. Some respondents do use set-off on joint accounts where
the debt is held solely in one person’s name, and we expect these firms to incur costs.
7.44 Respondents that do use set-off on joint accounts indicated that the incremental staff
costs of complying with our proposed guidance would be around Ł1.3 million per
year. In addition, the respondents stated that they would incur one-off costs of
complying with our proposed guidance in the region of Ł15 million without giving
further details, making it difficult to assess its reliability.
Benefits
7.45 Responses to the questionnaire suggest that there will be around 400,000 joint
account affected by this. We think our proposals are in line with our requirement to
treat banking customers fairly, which includes joint account holders. When set-off is
used on joint accounts where the debt is held solely in one person’s name, we believe
it may have the effect of making an account holder the guarantor of the other
account holder’s debts, but without the information that a guarantor should usually
be given. We believe that when set-off is used in such a scenario, it may come as a
surprise to the account holder who has not accrued the debt. Not using set-off in
these circumstances should enable consumers to have more confidence in their
personal banking and more certainty over their financial affairs. Most questionnaire
respondents either agreed with us about the benefits or simply stated that they did
not use set off in these circumstances.
7.46 Regarding the other types of accounts that we have identified, we think that some
consumers may benefit from not having money taken in a set-off transaction that
has been earmarked for essential payments such as health or social care payments, as
inability to pay for these essential services could have serious consequences.
Compatibility statement
7.47 We consider that our proposals are compatible with our general duties under Section 2
of FSMA. Our proposals are designed to meet our statutory objective of consumer
protection, in line with the benefits identified above. Some consumers should benefit
more widely due to increased knowledge of the right of set-off. Our more detailed
guidance will help ensure that firms deal fairly with consumers who are in payment
difficulties, or who are beginning to experience difficulties with meeting their payments.
Financial Services Authority 51
7.48 In developing our proposals, we have considered the principles of good regulation
and are satisfied that our proposals are the most appropriate for the purposes of
meeting our objectives for the reasons stated in the CP. In particular, we believe that
costs we impose on the industry are proportionate to the benefits that are expected
to result from these proposals. We do not expect the proposals in this CP to have
any material adverse effects on competition.
Contact
Comments should reach us by 6 September 2010. Please send them to:
Kirsten Jones
Conduct Policy
Financial Services Authority
25 The North Colonnade
Canary Wharf
London
E14 5HS
Telephone: 020 7066 7518
Fax 020 7066 7519
Email: CP10_15@fsa.gov.uk
Introduction
In this chapter we propose amending the Banking Conduct of 7.1 Business sourcebook
(BCOBS), to provide guidance in relation to exercising a right of set-off on retail
consumer accounts. We are extending the guidance to make reference to set-off in
BCOBS 4.1 (The appropriate information rule), and adding further guidance about
using set-off in BCOBS 5.1 (Post-sale requirements). We are also consulting on a minor
amendment to the BCOBS guidance relating to information about compensation
arrangements. This is a minor drafting change, and not a change in policy.
7.2 Our powers to give guidance, and the processes we must follow, are set out in
FSMA. The relevant sections are 155 and 157. These proposals will be of relevance
to banks, building societies and credit unions. They will also be of relevance to
consumer groups.
Background
7.3 In principle, under the common law of banking, a banker has the right of set-off
(sometimes called a right to combine accounts). This means that a bank may (but is
not obliged to) combine an account in debit against another account in credit and be
liable only for the balance.
7.4 The right of set-off falls within our remit on the deposit-taking side, with the
consumer credit aspects falling under the remit of the Office of Fair Trading (OFT).
The Lending Code, which is a voluntary code of practice for the industry, includes
guidance on using set-off and is monitored and enforced by the Lending Standards
Board. We believe set-off is covered within our high level principles and rules;
however, we think it would be helpful to set out in guidance in BCOBS what we
expect from firms regarding their use of set-off.
7.5 We recognised that set-off, affecting accounts within our scope, was potentially a
concern during 2009 when we were developing the banking conduct regime. This led
to us including a Q&A about set-off rights in the Moneymadeclear guide, Just the
facts about your bank account.17
17 http://www.moneymadeclear.org.uk/pdf...nk_account.pdf
Financial Services Authority 43
7.6 We understand that only a minority of customers are affected by set-off. Firms vary
in the frequency of their use of set-off – some use set-off relatively often, affecting
approximately 1–2% of all their customers, and others use set-off rarely. From
discussions with banks and building societies we also understand that set-off is
sometimes used in situations where some customers may regard it as a benefit, such
as when they have missed a credit card payment in error rather than due to
difficulties with meeting payments.
7.7 However, we have some evidence that consumer knowledge of the right of set-off is
low. We also have evidence that the use of set-off can be of significant detriment to
consumers if it causes them to struggle to meet their priority payments and living
costs. Citizens Advice Bureau (CAB) and Money Advice Trust have provided us with
a number of recent case studies that demonstrate the negative effects that the use of
set-off can have on consumers when it appears to have been used unfairly. In many
of the case studies, it seems that the consumer had no knowledge of the right of
set-off before it was used on their account. It also seems that in some instances, the
bank or building society had not left the consumer with enough money to meet their
priority payments and essential living costs. For example, some consumers were
unable to pay their mortgage or rent due to their bank or building society as a result
of set-off being applied to their accounts.
7.8 Problems presented by use of the right of set-off appear to be on the increase.
Citizens Advice has told us that the number of problems with set off dealt with by
Citizens Advice Bureaux in England and Wales has increased year on year over the
last three years. We also have evidence from some large retail banks that their use
of set-off has increased in the last year.
7.9 Taking the above factors into account, we have decided to consult on guidance for
firms in relation to their right of set-off, which we think will help to clarify how
customers should be treated fairly.
7.10 This chapter includes proposals on adding guidance to BCOBS regarding:
• the information that should be provided to customers before and after set-off
is used;
• how set-off payments should be determined; and
• the types of accounts that set-off should not normally be used on.
Proposed amendments
Appropriate information
7.11 We propose adding guidance to BCOBS 4.1 (as BCOBS 4.1.4AG(2)(a)), stating
that, to comply with the appropriate information rule, the firm should provide an
explanation to its retail customers of the nature and extent of the firm’s right of
set-off in good time before the consumer is bound by the contract for the retail
banking service. This information may be incorporated in the terms and conditions
that apply to the contract for the retail banking service.
44 CP10/15: Quarterly CP (July 2010)
7.12 Having gathered questionnaire responses from a selection of firms and after
discussing the subject with consumer agencies, we think that appropriate information
in the context of set-off means that, as a minimum, the information should be set out
in the account terms and conditions. This means that information about set-off
would be provided along with other details about the rights and obligations of the
customer, and also means that customer would have information about set-off that
they can refer to should the need arise. We have considered whether we should go
further by proposing that information about the right of set-off should be provided in
the pre-contract information separately from the terms and conditions. However, we
do not believe that doing so would provide additional benefits for most consumers.
7.13 Our reasoning is that requiring disclosure of set-off as part of the sales process
seems disproportionate and risks overloading consumers with too much information.
In addition, such a proposal would not directly benefit existing account holders, and
the impact on new account holders would be limited if set-off was applied a
significant amount of time after the account was opened.
Q21: Do you agree with our proposal that information
about set-off should be provided in the account
terms and conditions?
Q22: Do you see a need for further information, beyond
that set out in our proposal, to be provided about
set-off when a customer opens an account?
7.14 We also propose adding guidance to BCOBS 4.1 (as BCOBS 4.1.4AG(2)(b)), stating
that where a firm knows or reasonably ought to know that the consumer is beginning
or continuing to experience difficulties in meeting their payment obligations, the firm
should provide general information in relation to the nature of the firm’s right of
set-off, as well as the generic circumstances in which the firm may rely on that right,
within a reasonable period before the firm seeks to exercise its right of set-off. This
information may be communicated in a standard form of words and may be
incorporated in another communication sent by the firm to the consumer.
7.15 This does not mean the customer should be given specific notice that set-off will be
used on their account. Instead, customers should be given general information about
the right of set-off.
Q23: Do you agree with our proposal for firms informing
customers of the right of set-off when they are
beginning or continuing to experience difficulty in
meeting their payment obligations?
7.16 Finally, we propose inserting guidance to BCOBS 4.1 (as BCOBS 4.1.4AG(2)(c)),
stating that where a firm has exercised a right of set-off, it should provide prompt
notification of this to the consumer. This notification should clearly identify the date
that the firm exercised its right of set-off and the amount debited from the
consumer’s account in reliance on that right.
Financial Services Authority 45
Q24: Do you agree with our proposal that customers
should be promptly notified about the use of
set-off on their account?
Post-sale requirements
7.17 We propose adding to the guidance in BCOBS 5.1 (Post-sale requirements),
explaining banks’ responsibilities under Principle 6 (a firm must pay due regard to
the interests of its customers and treat them fairly) and BCOBS 5.1.1R. As far as is
practical, firms should review the information that is available and accessible to
them, relating to the consumer’s account, on an individual basis, and estimate the
amount of any ‘subsistence balance’.
7.18 We have defined subsistence balance as any sum of money payable by a firm to a
consumer or standing to the credit of the consumer in an account with the firm
where that sum is needed by the consumer to meet essential living expenses or
priority debts (whether owed to the firm or a third party).
Essential living costs – these include costs such as housekeeping, transport, and
health and social care payments. They will be difficult to determine in the case
of some customers, so we think it will be sufficient for firms to make reasonable
estimates about the amount required for a customer’s subsistence balance.
Priority debts – where non-payment can result in consumers being imprisoned,
losing their home or losing their essential goods and services. These include
mortgage/rent payments, utility bills and council tax.
Q25: Do you agree with our proposals for exercising the
right of set-off fairly?
Q26: Do you have any suggestions of other ways of
exercising the right of set-off fairly?
7.19 We also propose adding to the guidance in BCOBS 5.1, stating that firms should not
set off as far as practicable:
• any debt due solely from a consumer, or any debit balance on an account held in
the sole name of a consumer, against (or with) any sum of money payable by the
firm to that consumer and another person jointly or any credit balance on an
account held in the joint names of that consumer and another person;
• any debt due from, or a debit balance on an account held by, a consumer in a
personal capacity against (or with) any sum of money payable by the firm to the
consumer or standing to the credit of the consumer in an account held with the
firm, where the firm knows or reasonably ought to know that:
(i) a third party is beneficially entitled to that money or that the consumer is a
fiduciary in respect of that money; or
(ii) the consumer has received that money from a government department or
local authority for a specific purpose or is under a legal obligation to a third
party to retain and deal with that money in a particular way.
46 CP10/15: Quarterly CP (July 2010)
Q27: Do you agree with our proposal that firms should not
use set-off in the types of scenarios listed above?
7.20 We propose exempting credit unions from the proposals relating to the post-sale
period. There is a customised statutory regime for credit unions in the Industrial
and Provident Societies Act 1965 and Credit Unions Act 1979 – s.22 of the
1965 Act states:
“A registered society shall have a lien on the shares of any member for any debt due
to the society by that member, and may set off any sum credited to the member on
those shares in or towards the payment of that debt.”
On the basis that the exercise of set-off for credit unions is provided for in specific
legislation, we do not consider it to be appropriate to subject credit unions to
our post-sale proposals. However, we propose that the guidance on providing
appropriate information about set-off should apply, in the interests of transparency
and enabling credit union customers to make decisions on an informed basis.
Q28: Do you agree with our proposal to apply the guidance
in the information requirements to credit unions, but
exempt them from our post-sale guidance on set-off?
7.21 As we are consulting on guidance intended to illuminate existing rules rather than
making new rules, we do not propose a transitional period.
Q29: Do you agree that our proposed guidance should take
effect immediately?
Information about compensation arrangements
7.22 We are also using this opportunity to consult on a minor amendment to the text in
BCOBS referring to information about compensation arrangements. BCOBS 4.1.4G
sets out the type of information that should be provided or made available to a
banking customer in order meet the requirements of the appropriate information rule
(4.1.1R). With the commencement of COMP 16 on 1 January 2010, we altered the
reference in BCOBS 4.1.4G(8), to read ‘information about compensation arrangements
in accordance with COMP 16’. COMP 16 sets out the information about
compensation that relevant firms must disclose, how frequently that information
should be disclosed and the methods of communication that should be used.
7.23 In order to clarify our expectations, and to reduce cross-references in the Handbook,
we propose to amend 4.1.4G(8) to instead read “the terms of any compensation
scheme if the firm cannot meet its obligations in respect of the retail banking
service”. This does not represent a change in policy or interpretation, and there are
therefore no additional costs or benefits associated with this clarification.
Q30: Do you have any comments on our proposed
amendment to BCOBS 4.1.4G(8)?
Financial Services Authority 47
Cost-benefit analysis
7.24 Banks, building societies and credit unions will be affected by our proposals relating
to set-off. We estimate up to 387 banks and building societies, which are FSA/ EEA
authorised firms, and 494 credit unions may be affected.18
7.25 To assess the impact on firms, we sent a questionnaire to a sample of banks and
building societies, asking them to estimate the potential costs arising from our
proposals. We received eight responses: six banks and two building societies.
7.26 Respondents represent approximately 55% of the personal current account market.
Respondents varied in the frequency of their use of set-off; some made relatively
high numbers of set-off transactions (1–2% of all their customers were affected),
and others used set-off rarely.
Direct costs to the FSA
7.27 The proposals will result in minimal incremental costs to the FSA. Supervisors will
take account of the new guidance within their existing supervisory approach.
Appropriate information
Adding guidance in BCOBS regarding the information that should be provided to
customers before and after set-off is used
Compliance cost
7.28 In summary, most respondents thought that significant incremental costs or benefits
were unlikely to result from our proposals to add guidance to BCOBS regarding the
information that should be provided to customers before and after set-off is used
(paragraphs 7.11 – 7.16).
7.29 Most respondents stated that they already include information about set-off in
account terms and conditions. One respondent indicated that it does not include
information about set-off in the account terms and conditions. For this firm and any
other firms who are currently not including information about set-off in the account
terms and conditions, potential costs of this proposal would be the one-off costs of
legal review and documentation re-print. One respondent indicated that one-off
reprinting costs could be around Ł30,000 per firm but noted that these costs would
be minimal if sufficient time were given to run down stocks.
7.30 Most respondents stated that they either do notify customers of the right of set-off
before it is used on their account (where the customer has missed credit repayments),
or they are planning to introduce this practice shortly. One respondent (with fewer
than ten set-off transactions per year) commented that they only use set-off at the
end of a banking relationship with a customer. We are following up on this to obtain
more information. We think overall that the costs of this proposal will be minimal.
18 This figure is calculated from the number of firms with the regulated permission for ‘deposit taking’, taken from the
FSA’s register as of 31 March 2010.
48 CP10/15: Quarterly CP (July 2010)
7.31 All respondents stated that they do provide customers with prompt notification of
set-off, and include the figure in customer statements, so again we believe the costs
of this proposal will be minimal.
Benefits
7.32 Our proposed guidance on providing appropriate information about set-off in
account terms and conditions increases transparency about set-off for all consumers
opening accounts, as consumers will be provided with relevant information to which
they can refer at a later date. This may help to empower some consumers and result
in some people managing their accounts on a more informed basis.
7.33 Firms providing information to customers about set-off when they get into payment
difficulties could encourage some customers to contact their bank or building society
and then work to agree a way forward.
7.34 Some customers might be clearer about their financial position and so should be
in a better position to organise their finances as a result of firms providing prompt
notification of the use of set-off.
7.35 However, based on our research on consumer behaviour in financial markets,19 we
acknowledge that significant incremental benefits may not result from our proposals.
The benefits will depend on the number of consumers that are likely to act on the
information provided before and after set-off is used; this number may not be high.
Post-sale requirements
Adding guidance in BCOBS regarding how set-off payments should be determined
Compliance cost
7.36 In summary, most respondents thought that significant incremental costs were
unlikely to result from our proposals of adding guidance in BCOBS regarding the
post sale requirements (paragraphs 7.17 – 7.18). However, some firms will be
affected by the proposals and thus we expect that some firms will incur costs in the
amount of Ł3million to Ł4 million per year.
7.37 The majority of respondents say they already consider customers on an individual
basis, leaving them with enough money to meet their priority debts and essential
living costs. So for these firms, we think the costs of this proposal will be minimal.
7.38 However, the questionnaire also suggests that some firms may need to adjust their
practices in the light of the proposed guidance, in order to proactively consider
customers on an individual basis.
7.39 It was indicated that a basic assessment to identify whether a customer is in payment
difficulties, and estimate the amount needed to meet priority debts and essential living
costs, would take around 10–12 minutes per customer. Most of this additional work
will be done by administrator-level employees whose hourly rate has been estimated
19 http://www.fsa.gov.uk/pubs/consumer-research/crpr69.pdf
Financial Services Authority 49
at Ł10 (i.e. average Ł16,000 p.a.) including a standard overhead of 30% in
accordance with the Standard Cost Model (SCM).20 Therefore, we estimate the
incremental cost to firms to be Ł1.50–2.00 per customer. Given the data obtained
from firms’ responses to the questionnaire, we think approximately two million
set-off transactions would be affected. So, as a result of this proposal, the overall
costs to these firms will be in the region of Ł3–4 million per year. However, these
estimates represent an upper bound for compliance costs as firms are expected to
introduce cost efficient ways to deal with the issue.
Benefits
7.40 The benefit of firms leaving customers with enough money to meet their priority
payments and essential living costs will be that some customers may avoid getting
into more serious difficulties, due to being unable to pay their rent/mortgage and
other key expenses. It should also result in a smaller likelihood that customers and
any dependents will be left without enough money to live on and resort to some
type of short-term emergency finance. Finally, it should also limit the possible
intangible negative effects of set-off transactions (for example, the disruptive effect
of having to unexpectedly renegotiate other payments).
7.41 The tangible benefits are potential savings for consumers from avoiding costs associated
with having to resort to some type of short-term emergency finance and/or being
unable to pay their rent/mortgage and other key expenses. From the questionnaire, it
was estimated that a typical set-off is between Ł100 and Ł200 per transaction. From an
informal survey of short-term lenders currently active in the market, we estimate the
average interest rate charged on short-term loans is around 300–400% per year. Thus,
the cost of short-term lending to cover a typical set-off transaction of Ł100–200 will be
between Ł25 and Ł60 per month. In addition, there are potentially other costs that a
customer would incur due to being unable to pay their rent/mortgage and other key
expenses. For example, mortgage arrears charges vary between Ł30 and Ł50 with an
average arrears charge of Ł40 per month.21 Therefore, we estimate that a typical benefit
of firms leaving customers with enough money to meet their priority payments and
essential living costs will vary between Ł65 and Ł100.
7.42 If the number of set-off transactions per year that fail to meet the required standards
of fairness is 30,000–60,000 or more (which represents between 1.5% and 3% of
approximately 2 million set-off transactions that would be affected), this would
exceed the expected compliance costs resulting from these proposals (Ł3–4 million,
see paragraph 7.39). Based on our supervisory experience, number of set-off
transactions that are not currently in line with the requirements of BCOBS
and the Principles for Businesses is likely to be at least equal to this figure.
20 Real Assurance 2006 study on administrative burdens.
21 See FSA CP10/2 “Mortgage Market Review: Arrears and Approved Persons”
50 CP10/15: Quarterly CP (July 2010)
Adding guidance to BCOBS regarding types of accounts on which set off should not
be used
Compliance cost
7.43 The majority of respondents do not use set-off on any of the types of accounts we
have identified above (paragraph 7.19). For these respondents, the costs of this
proposal will be minimal. Some respondents do use set-off on joint accounts where
the debt is held solely in one person’s name, and we expect these firms to incur costs.
7.44 Respondents that do use set-off on joint accounts indicated that the incremental staff
costs of complying with our proposed guidance would be around Ł1.3 million per
year. In addition, the respondents stated that they would incur one-off costs of
complying with our proposed guidance in the region of Ł15 million without giving
further details, making it difficult to assess its reliability.
Benefits
7.45 Responses to the questionnaire suggest that there will be around 400,000 joint
account affected by this. We think our proposals are in line with our requirement to
treat banking customers fairly, which includes joint account holders. When set-off is
used on joint accounts where the debt is held solely in one person’s name, we believe
it may have the effect of making an account holder the guarantor of the other
account holder’s debts, but without the information that a guarantor should usually
be given. We believe that when set-off is used in such a scenario, it may come as a
surprise to the account holder who has not accrued the debt. Not using set-off in
these circumstances should enable consumers to have more confidence in their
personal banking and more certainty over their financial affairs. Most questionnaire
respondents either agreed with us about the benefits or simply stated that they did
not use set off in these circumstances.
7.46 Regarding the other types of accounts that we have identified, we think that some
consumers may benefit from not having money taken in a set-off transaction that
has been earmarked for essential payments such as health or social care payments, as
inability to pay for these essential services could have serious consequences.
Compatibility statement
7.47 We consider that our proposals are compatible with our general duties under Section 2
of FSMA. Our proposals are designed to meet our statutory objective of consumer
protection, in line with the benefits identified above. Some consumers should benefit
more widely due to increased knowledge of the right of set-off. Our more detailed
guidance will help ensure that firms deal fairly with consumers who are in payment
difficulties, or who are beginning to experience difficulties with meeting their payments.
Financial Services Authority 51
7.48 In developing our proposals, we have considered the principles of good regulation
and are satisfied that our proposals are the most appropriate for the purposes of
meeting our objectives for the reasons stated in the CP. In particular, we believe that
costs we impose on the industry are proportionate to the benefits that are expected
to result from these proposals. We do not expect the proposals in this CP to have
any material adverse effects on competition.
Contact
Comments should reach us by 6 September 2010. Please send them to:
Kirsten Jones
Conduct Policy
Financial Services Authority
25 The North Colonnade
Canary Wharf
London
E14 5HS
Telephone: 020 7066 7518
Fax 020 7066 7519
Email: CP10_15@fsa.gov.uk
Anyone any specific thoughts on this one ?
Comment