It is no longer legal for a bank to grab money out of your account in settlement of debts falling under the National Credit Act (NCA) unless you specifically authorise it.
That was the outcome of a court case in the South Gauteng High Court last week, initiated by the National Credit Regulator (NCR) against Standard Bank.
Judge Raylene Keightley found in favour of the NCR, which was joined by the SA Human Rights Commission (SAHRC) as a friend of the court.
The practice of ‘set-off’ has long been a part of common law. It meant that if you owed the bank money, say because you were behind on your mortgage bond, the bank was within its rights to grab money out of your account as soon as funds appeared in the account. And it could grab any amount it considered validly due to it – including legal costs and admin fees.
The borrower was then left to argue this with the bank after the fact.
The problem with this is that it privileged the banks above other creditors, and often left the debtor with no money to cover essentials such as food and lights. That brings in Constitutional issues such as rights to property and dignity.
When the NCA came into force in 2007, it determined very specific conditions under which set-off could be applied. These new set-off rules were much more in favour of the consumer. The debtor must authorise the payment, and funds are required to be deposited specifically for the purpose of settling the debt. The bank is also required to notify the debtor of its intention to deduct funds from the account.
The common law principle of set-off was so weighted in favour of the banks that they could deduct funds without notice from your account, and without giving you an opportunity to query it. What often happens in practice is that legal and other unauthorised amounts are deducted in addition to the debt instalment. Debtors could challenge this in court, but very few did because of the outrageous costs of taking on deep-pocketed banks in litigation.
It is little wonder that the banks, presented with two possible legal interpretations of set-off, chose the one most favourable to themselves – the common law principle.
Standard Bank’s argument
Standard Bank argued that common law set-off was an important tool for debt recovery and considered it as part of its security when granting a loan.
The case highlights some devious practices by the banks: their credit agreements used to include clauses on how they would go about applying set-off, but in more recent years their agreements went silent on the subject. By remaining silent on set-off in their credit agreements, they were able to rely on the common law interpretation of set-off and carry on grabbing money out of customers’ accounts as before.
The NCR argued that if this was allowed to continue, it meant the NCA was of no force whatsoever when it came to curbing the abuses of set-off.
Concept of debt review undermined
The NCR and the SAHRC argued that Standard Bank’s interpretation of the NCA undermined debt review, which allows an over-indebted person to apply to court for a rescheduling of debt repayments. A debt counsellor, in an affidavit in support of the SAHRC, deposed that banks continue to practice set-off, even when customers are under debt review.
This has a crippling effect on the debtor, as set-off is almost always done without notifying or interacting with the account holder. It often means consumers are unable to meet their repayment obligations to other creditors, and where children are involved, there may be insufficient funds for school fees and basic necessities.
The bank argued that the NCA’s set-off provisions only applied if set-off was expressly included in a credit agreement, but the judge kicked this argument to touch.
The bank is perfectly happy to keep consumers in the dark by keeping any mention of set-off out of their credit agreements, yet expects to rely on common law set-off (which is far less favourable to the consumer) when it comes to recovering their debts.
This, the court found, was subversive of the NCA’s aim of “addressing and correcting imbalances in negotiating power between consumers and credit providers by … providing consumers with protection from deception, and from unfair conduct by credit providers …”
“The judgment has provided the much-needed clarity on the position in law and marks the end to a destructive practice wherein set-off is often times applied without any notice to, or interaction with, the consumer,” said the SAHRC in a statement in response to the court ruling.
The judgment says “the common law right to set-off is not applicable in respect of credit agreements with are subject to the National Credit Act.”
Costs were awarded against Standard Bank.
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