Banks can no longer set off your debt

Nomsa Motshegare, CEO of the National Credit Regulator
Nomsa Motshegare, CEO of the National Credit Regulator

In an article that appeared in City Press two years ago, we wrote about how a Standard Bank client had had money deducted from his current account to settle outstanding debt on his credit card account, without his permission.

In this specific case, the client had received money from his father to pay for his studies.

Standard Bank immediately transferred the deposited funds to settle the outstanding amount in the student’s credit card account.

This left him unable to register for university.

Although Standard Bank had agreed to refund a portion of the money, the bank had maintained that it had a “common law” right to “set off”.

This meant that it was 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.

The common law setoff is applied when two persons owe each other and the debts are extinguished by setting them off against each other.

The banks apply this by transferring funds deposited into consumers’ accounts to settle debts on credit agreements without the consumers’ authorisation.

At that time, the banks and the National Credit Regulator had been in dispute as to whether or not the National Credit Act (NCA) prohibited the application of the common law principle of setoff.

Prior to the implementation of the act, which came into effect on June 1 2007, the banks had included a clause in the contract when you opened a bank account, which allowed them to deduct funds for setoff.

This is no longer allowed under the NCA, so the banks no longer insert such a clause and, technically, cannot debit an account for a loan repayment unless the customer agrees beforehand.

However, some banks continue to apply the common law principle of set off on accounts opened after June 1 2007, despite the provisions in the act.

In order to resolve the issue, the regulator took the matter to court and, last week the Johannesburg High Court ruled in favour of the regulator against Standard Bank that the common law setoff does not apply to credit agreements subject to the act.

According to Nomsa Motshegare, CEO of the regulator, this now means that banks must obtain permission from consumers before transferring funds from their accounts to pay amounts due under credit agreements.

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