Credit battle begins: NCR takes bank to court over common law set-off

Cape Town - The National Credit Regulator (NCR) has gone to court to get legal clarity on the effect of section 124 of the National Credit Act 34 of 2005 on the common law set-off, it said on Tuesday.

The NCR applied for a declaratory order in the North Gauteng High Court against Standard Bank, it said in a statement.

“The typical application of the common law set-off is found in the banking industry where a bank would transfer funds from a consumer’s savings account to settle an outstanding balance on the credit account without the consumer’s authorisation,” said Nthupang Magolego, senior legal advisor at the NCR.

“The consumer’s savings account is debited in order to settle a debt owed under a credit account,” said Magolego.

The NCR is seeking an order from the High Court that the common law set-off has been superseded by section 124 of the NCA. The common law set-off is applied when two persons owe each other and the debts are extinguished by setting them off against each other.   

“This practice 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,” said Magolego.

“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.”

Section 124 of the act says that “before making a single charge… the credit provider must give the consumer notice in the prescribed manner and form, setting out the particulars as required by this subsection, of the charge or charges to be made under that authorisation.”

Banks continue to use set-off despite NCR stance - ombudsman

Clive Pillay, ombudsman for Banking Services, said in a 2009 note that the Code of Banking Practice “only requires the bank to advise you afterwards that it has applied set-off to an account”.

“The argument is that if any prior notice had to be given then the customer would simply withdraw the money from the account before the bank can apply set-off.”

He said the legal opinions by the bank said the NCA did not in any way prohibit the bank from using the common law principle of set-off.

“The National Credit Regulator does not agree with the legal opinions that the banks obtained and remains of the view that the banks may not apply set-off on any loan contracts entered into after 1 June 2007 unless it is done in accordance with the provisions of the NCA – Section 124.

“The current position however is that the banks are applying the common law principle of set-off despite the view of the National Credit Regulator.

“Until the issue is resolved by new legislation or a court of law the banks will therefore continue to apply set-off.”

That court challenge has now started.

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