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Finance brief - 1 July 2013
- Announcement of LIBOR changes
- Farewell to the Mandatory Costs Schedule?
- BCOBS: Use of the right set-off
- Can a lender ever rely on a material adverse change event of default?
- A guide to lending against life assurance policies
- Trophy properties - some considerations for lenders
The information requirements set out in the Banking: Conduct of Business Sourcebook ("BCOBS") in relation to the exercise of the right of set-off were last updated in 2011. However, in light of queries on the use of the right to set-off we have recently received from our clients we thought it would be useful to remind all those providing retail banking services of the relevant requirements.
BCOBS provides guidance on two areas in relation to set-off: (i) information that should be given to retail customers about set-off; and (ii) fair treatment of customers where the right to set-off is or is proposed to be exercised.
BCOBS Chapter 4: Information to be communicated to banking customers about set-off
Under the information rule BCOBS 4.1.1 R, a firm must provide or make available to a banking customer appropriate information about a retail banking service and any deposit made in relation to that retail banking service:
(1) in good time;
(2) in an appropriate medium; and
(3) in easily understandable language and in a clear and comprehensible form:
so that the banking customer can make decisions on an informed basis.
In order to ensure compliance with the above rule, BCOBS requires of firms the following:
(1) To provide to the retail customer (and where a joint account is involved, to the joint account holder) an explanation of the nature and extent of the rights of set-off in good time before the customer is bound by the contract for the retail banking service.
This information can be incorporated into the account terms and conditions and there is no need to provide it in a separate document. Handbook Notice 107 sets out the expectation of the Financial Services Authority ("FSA") that firms provide meaningful information in plain and intelligible language to explain the right, and how it applies and can be used in the context of the banking relationship.
(2) To provide (i) on the first occasion and (ii) where appropriate, on any subsequent occasion that the firm proposes to exercise a right of set-off, general information in relation to the nature of the right of set-off and the generic circumstances in which the firm may rely on that right within a reasonable time beforehand.
In Handbook Notice 107, the Financial Conduct Authority ("FCA") explained the policy intentions for the information to be given at a time when it is relevant to the customer's circumstances and the exercise of set-off is in prospect as opposed to the provision of such information at an unduly early stage. For these reasons, the FCA considers a reasonable period to be 14 days before the firm seeks to exercise its right to set-off.
BCOBS is not prescriptive as to how the information is presented and allows for it to be incorporated in a communication to the customer about something else. However, firms should ensure that the relevant information is not hidden so as to get lost in small print.
The information does not need to be given on each occasion that a firm proposes to use its right of set-off. Whether or not the information will need to be provided on subsequent occasions will depend on individual circumstances and in particular the amount of time that has elapsed since the most recent time that the information was provided to the customer.
(3) To provide prompt notification to the customer where it has exercised a right of set-off which should identify the date when the right was exercised and the amount debited.
Handbook Notice 107 defines "prompt" as meaning without delay. The FCA normally expects firms to notify customers of the use of set-off on the same day or the next working day. A notification needs to be provided on each occasion that the right of set-off is exercised.
BCOBS Chapter 5: Right of set-off is to be used in a way that is fair to customers
Under BCOBS 5.1.1 R, a firm must provide a service in relation to a retail banking service which is prompt, efficient and fair to a banking customer and which has regard to any communications or financial promotion made by the firm to the banking customer from time to time. In addition, under Principle 6 a firm must pay due regard to the interests of its customers and treat them fairly.
In order to ensure compliance with the above obligations, BCOBS requires a firm on each occasion where the firm proposes to exercise a right of set-off:
(1) to review the information available to the firm in relation to the customer's account and leave the customer with an amount of money that the customer requires to meet their essential living expenses or priority debts (whether owed to the firm or a third party); and
(2) to refrain from setting-off against any sums where the firm knows or reasonably ought to know that a third party is beneficially entitled to that money or that the customer is a fiduciary in respect of that money, or where the customer has received that money from a government department, local authority or NHS direct payment body 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.
If following the exercise of a right of set-off, it becomes apparent that the firm has set off a debt in breach of the above guidance, the firm should refund the money to the customer unless it is fair not to do so. If no refund is made, the firm must be able to justify that it is fair not to do so and should also consider taking other remedial action.
In Handbook Notice 107, the FCA explained that firms are not expected to spend time estimating a subsistence balance if it is clear that sufficient sums will be left over in the account after a set-off has taken place. The key is that firms do not use set-off on funds that are intended for purposes such as health or social care payments providing however that the firm has sufficient information regarding the use of funds deposited in the customer's account. To this end, the FCA expects firms to keep record and consider information provided by customers about the intended use of the deposited moneys.
BCOBS does not specify a minimum sum of money that should be left in the account or a maximum ratio of set-off on the basis that such approach would be inflexible and could have the effect of discouraging firms from considering set-off circumstances on an individual basis.
We are happy to provide further information and guidance, so please feel free to contact us if you have any specific queries or concerns regarding the set-off provisions in your standard terms and conditions or the procedures applied within your organisation in relation to the exercise of your set-off rights.