Desmond Rutledge considers whether the protection conferred on welfare benefits under Social Security legislation continues once those benefits have been paid into a current bank account.
Are welfare benefits protected from recovery of a debt owed to a bank?
Welfare benefits are paid to cover the recipient’s essential living expenses and, where applicable, to contribute to their housing costs (see Burnip v Birmingham City Council & Anor  EWCA Civ 629, at -,  and R (MM & Ors v Secretary of State for the Home Department  EWHC 1900 (Admin) at ). Where, however, welfare benefits are paid into the claimant’s current account, the bank or building society can use the money in that account to make repayments towards bank loans or credit cards, and where the account goes into debit, on interest payments and bank charges, even if this results in the claimant having insufficient funds to cover essential payments. Many have argued that this is prohibited as the mainstream welfare benefits and tax credits are protected under social security legislation and banks may not automatically use those funds to pay unsecured debts or to recover an overdraft. For some examples of the argument from the internet see; HSBC-Social Security Administration Act 1992 (7 July 2009), Bank charges when receiving benefits (6 Aug 2011) and Bank Charges Not Allowed on Certain Benefits! (26 Feb 2011).
Section 187(1) of the Social Security Administration Act 1992 (the 1992 Act), as amended by the Jobseekers Act 1995, Sch.2 para.72, the State Pension Credit Act 2002, Sch.2(2) para.23, and the Welfare Reform Act 2012, Sch.2 para.30, Sch.3 para.10(31) and Sch.9 para.3, provides that every assignment of or charge on the welfare benefits, and every agreement to assign or charge such benefits “shall be void”. (Section 45(1) of the Tax Credits 2002 (“the 2002 Act”) has the same effect in relation to Tax Credits). When, however, this argument was raised in a petition to the Prime Minister in 2008, the Government denied that this was the case, saying that:
“The purpose of the Social Security Administration Act 1992 Section 187 and section 45 of the Tax Credits Act 2002 is to prevent people’s benefit money being at risk by it being assigned over to a third party in settlement of a debt. It is not intended to prohibit the application of bank charges. Bank charges are in the nature of an expense, and are incurred by the holder of the account; tax credits and benefits are payable in order to help customers meet their expenses, and as such it is legitimate for banks to deduct charges from the balance of an account held in that bank, whether the money paid into the account comes from tax credits, benefits or other sources, such as earnings.”
In other words, when welfare benefits payments are made into a current bank account, they are subject to the rules governing banks, just like any other form of payment.
The rules governing bank accounts
The rules governing bank accounts have their origins in the common law. The main principles are listed below:
- The relationship of the bank and the customer who pays money into the bank is that of creditor and debtor. The money paid into the bank account does not, however, consist of the customer’s money as such. Rather, it is part of the bank’s general assets, subject to the bank’s promise to pay the customer an equivalent sum when drawn upon (Foley v Hill (1848) 2 HLC 28, applied in Joachimson v Swiss Bank Corporation  3 KB 110).
- Where a customer draws a cheque for a sum in excess of the amount standing in credit in his or her current account, it is in effect a request for a loan, and if the cheque is honoured, the customer has borrowed money from the bank (Cuthbert v Robarts, Lubbock & Co  2 Ch 226, p 233 CA).
- The party who pays money into a bank account has a right to apply that payment as s/he wishes. This is known as the first right of appropriation. If, however, the customer does not exercise this right at the time of payment, the party receiving the money (i.e. the bank) may decide how the money should be used; the second right of appropriation. In the absence of any specific instruction the rule in ‘Clayton’s case’ applies, i.e. each credit paid into the bank account is deemed to pay the earliest debit out (Clayton’s Case (1816) 1 MER 572, applied in Deeley v Lloyds Bank Ltd  AC 756).
Given the above, a bank has a common law right, without prior notice, to take funds from an individual’s current account and apply them to the outstanding debts owed to the bank on another account, e.g. on credit cards or loans at the same bank. This is known as the “right of set-off” or a “banker’s lien” and arises from the nature of the banker-client relationship as developed by the common law.
The social policy background
The issue of whether a bank’s right of set-off applies where the payments into the account consist of welfare benefits affects a large number of claimants due to the government’s policy of paying state benefits direct into a bank account (in place of giro payments) and the payment of Housing Benefit into the tenant’s bank account instead of direct to the landlord (to encourage greater ‘financial responsibility’). Against this background, whilst it may seem to the bank that substantial sums are being paid into the individual’s current account, the reality is that they are earmarked for other purposes. The following case studies based on evidence collected by Citizens Advice show the consequences for individuals where banks have exercised their right of set-off:
“A CAB in Essex saw a lone parent with debt problems, including rent arrears. Her housing benefit was paid directly into her bank account. The bank was appropriating the money to pay off a personal loan and credit card debt to themselves. The client’s landlord issued a notice for possession, following the expiry of which court proceedings would follow.”
“A CAB in Oxfordshire saw a woman who had been made redundant in August 2009 and was now in receipt of jobseekers allowance. After experiencing problems with bank charges after exceeding her overdraft limit, she was keen to ensure that she could withdraw all her housing benefit from her account to pay her rent. The bank assured her that her money would remain secure and she would have no problem. However, the bank’s credit card company took almost £600 from her current account. This represented two thirds of the rent she owed her landlord. Although the client was able to persuade the credit card company to transfer all the money back, it took a week for them to do so. In the meantime, the client had been extremely worried about losing her home. She had also spent a lot of money making repeated phone calls and travelling to the bank branch to sort out the problem.”
“A Surrey CAB was helping a lone parent who owed £17,000 including an overdraft and a credit card debt to her bank. Her sole income was benefits and some maintenance from the children’s father. So that she could manage her money effectively, she had set up a transfer of £250 from her current account to her savings account to pay the shortfall on her rent due after payment of housing benefit. Her bank used £230 of this to pay off some of the balance on her credit card, without consulting her first.”
(Source CP 10/15: Quarterly Consultation Response by Citizens Advice to the Financial Services Authority.)
The legal issues arising out of the interrelationship between the rules governing bank accounts and section 1987 of the 1992 Act
The upshot is that where welfare benefits are paid into the claimant’s current account but he or she gives no instructions as to how the money being paid into the account is to be allocated, then the bank is at liberty to use some or all of the money in the account towards repaying debts owed to the bank. Many argue that this is prohibited because social security law recognises that the recipients of welfare benefits need a certain amount of money to cover their essential living costs. The argument raises a number of questions regarding the relationship between the rules governing bank accounts and social security legislation including:
- What is the nature and scope of the protection conferred on welfare benefits under section 187 of the 1992 Act?
- Is the protection granted to welfare benefits under section 187 of the 1992 Act lost once they are paid into the recipient’s bank account?
- Does section 187 of the 1992 Act assume the common law rules for bank accounts would apply or does it seek to create an exemption to those rules?
- Whether, as a matter of statutory construction, the protection given to “every assignment of or charge on” welfare benefits covers the situation where a third party (i.e. a bank) is seeking to exercise a right of set-off to pay a debt?
These issues were considered in the ‘Scottish case’ described below.
The Scottish Case – the initial decision (reported)
North Lanarkshire Council v Crossan 2007 SLT (Sh Ct) 169, concerned an action brought by the Council to enforce a Council Tax debt by way of “arrestment” (which is equivalent to a garnishee order over a bank account in the county court in England and Wales), thereby freezing the money held in Ms Crossan’s bank account so that it could be used to pay Council Tax debt. The case raised the legal issue of whether the order for “arrestment” was prohibited by the provisions in section 187 of the 1992 Act (and section 42(1) of the Tax Credits Act 2002).
Shirley Crossan (“the common debtor”) was a single parent with two dependent children. She held a bank account with Airdrie Savings Bank into which her state benefits were being paid. Those payments comprised of Income Support, Child Benefit and Tax Credits, together with a £400 budgeting loan from the Social Fund. On 21 March 2005, the balance in Ms Crossan’s account was £2,244.91. The Council applied for the balance in Ms Crossan’s bank account to become subject to an arrestment order in pursuance of a number of summary warrants issued in respect of unpaid Council Tax for the years between 1993/1994 and 1997/1998.
Ms Crossan challenged the Council’s application arguing that as the money in her account comprised of welfare benefits payments, it was exempt from arrestment as:
- State benefits were alimentary in nature (i.e. payments that by their nature are not available to creditors) and were therefore at common law not lawful subjects of arrestment (an action to enforcement of a debt by a third party). The provisions in section 187 of the 1992 Act and section 42(1) of the 2002 Act reinforced this by providing statutory protection for welfare benefits against arrestment.
- While the ‘attachment’ (action to enforce a debt) had been against Airdrie Savings Bank rather than the DWP, this was immaterial as when the welfare benefits were paid into the bank it was not mixed in with other funds as they were clearly identifiable as payments of benefits from the DWP and HM Revenue and Customs. Accordingly, the protected status of the payments persisted and therefore the purported arrestment was illegal.
- Reliance was also placed on Woods v Royal Bank of Scotland 1913 SLT 1 Reports 499 (Sheriff Court) as authority for the proposition that where exempt funds (i.e. compensation paid under the Workman’s Compensation Act 1906) are paid into a bank account, those funds remain exempt from arrestment insofar as they can be clearly identified within an account.
In the case of Woods, a sum of £325 had been paid to Mrs Woods under the Workmen’s Compensation Act 1906. Under section 19 of the first schedule to the Act: “A weekly payment, or a sum paid by way of redemption thereof, shall not be capable of being assigned, charged, or attached, and shall not pass to any other person by operation of law, nor shall any claim be set off against the same.” The Court held that so long as the sum could be identified as “paid by way of redemption” it remained under the protection of the section. The same approach was adopted in William Baird & Company Limited v Campbell 1928 SLT 201, a decision of the Court of Session (Inner House, Second Division) where the Court held that money paid into court as compensation under the Workmen’s Compensation Act 1925had been ring-fenced by the Act and was therefore exempt from arrestment (debt recovery).
In reply, the Council argued that funds paid under social security legislation into the claimant’s bank account were subject to the common law rules governing bank accounts, and this was determinative of the issue. The Council relied on Royal Bank of Scotland v Skinner 1931 SLT 382 as authority for the proposition that once monies had been paid into a bank, the funds were “consumed” by the banker, who in return gives an obligation to account for an equivalent amount to the customer. Accordingly, while welfare benefits were initially exempt (alimentary), they ceased to be protected by the legislation once paid into Ms Crossan’s current account. At that point, the funds changed in nature and were arrestable.
In a judgment delivered on 3 July 2007, the Court accepted the Council’s argument that once the welfare benefit payments were paid into Ms Crossan’s bank account, the protection under the legislation was lost and the common law rules applied. In Sheriff Galbraith’s view, Parliament only intended to protect the obligation existing between the payer (the DWP) and the payee (the claimant) and not the secondary relationship between the bank and its customer:
“Once the funds were deposited in the common debtor’s bank account she was vested in them. The nature of the relationship between customer and banker is then the relevant one to determine this issue. The case of Royal Bank of Scotland v Skinner makes clear that that relationship is one of debtor/creditor and Lord Mackay’s clear description of that relationship at p 384 is particularly helpful. …The funds then, once paid in my view cease to be protected in terms of the legislation. The legislation in the modern statutes is clear and in my opinion the intention of Parliament was to protect what could be termed as the initial relationship being the obligation which existed between the payer and the payee. Once the situation moves to what is really the secondary relationship between banker and customer the protection is lost. The funds held by the bank are then arrestable and the common debtor’s argument fails.”
Anyone undertaking legal research on section 187(1) of the 1992 Act using the subscription services designed for legal practitioners will be referred to North Lanarkshire Council v Crossan 2007 SLT (Sh Ct) 169 as a key authority on the meaning of the section. It is clear from the reply to a Freedom of Information request dated 23 October 2012, that the DWP has adopted the legal analysis in the Scottish case – namely that once welfare benefits are paid into a bank account it becomes part of the general funds held in a bank account and thereby ceases to come under the protection of social security legislation:
“I am afraid that Social Security legislation does not prohibit bank charges being deducted from a person’s account. Once benefit money has been credited to a nominated bank account it ceases to be a discrete and identifiable payment of benefit, but simply merges with the balance of the account. If the account is overdrawn the benefit payment will normally be offset against the amount owed, including any bank charges.”
The Scottish Case – on appeal (unreported)
If those drafting the DWP letter of reply (above) had carried out a more extensive search, they would have discovered the following entry on the Goven Law Centre website:
“July 2008 update: Sheriff Principal Kearney holds identifiable benefits and tax credit are not subject to bank arrestment (opens as PDF – decision from page 20, paras 43 to 53) – overturning North Lanarkshire Council v Crossan 2007 SLT (Sh Ct) 169. GLC is obliged to Andrew Fitzpatrick of the MFY Partnership Solicitors (Airdrie & Cumbernauld) for a copy of this judgment; MFY acted for the debtor and appellant.”
The transcript of the judgment dated 2 May 2008 reveals that Sheriff Principal Kearney allowed Ms Crossan’s appeal and thereby overturned the decision of Sheriff Galbraith of 3 July 2007. Ms Crossan’s grounds of appeal were that the Sheriff had erred in law in finding that the funds in question were no longer exempt from being used to enforce a debt when paid into the claimant’s bank account and that the Sheriff had been wrong to find that the intention of Parliament was to protect the initial relationship which existed between payer and payee.
Allowing the appeal, the Principal Sheriff held:
(i) Since the funds at issue (state benefits paid into Ms Crossan’s bank account) were the product of a statutory provision, then the question of whether or not they were arrestable when paid into a bank account must be determined principally by consideration of the statutes concerned.
(ii) While in the ordinary case, once funds are paid into a bank account they were, in the words of Lord Mackay in Skinner, “consumed” by the bank, Woods and Baird were decided on the basis that the provisions of the Workman’s Compensation Acts created an exception to that general rule.
The judgment concludes:
“The cases of Rosewell Gas Co Ltd and William Baird & Co Ltd in their different ways, sustained the approach that the fundamental purpose of the awarding of benefits should be attended to. Counsel for the respondents emphasised that the function of the Department of Work and Pensions had been exhausted once the payments had been made and I think it is plainly correct. However I do not think it affects the issue of whether the immunity possessed by these funds persists after lodgement in the bank and cases such as Barid and Cladwell as well as the case of Woods suggests that this should be the approach of the court. I think it is legitimate to consider the underlying purpose of the Social Security legislation and that Mrs Thornton [Counsel for the appellant] was correct in saying that this is to provide the beneficiary and her dependents with the necessities of life. That being so, I consider that an interpretation of the provisions relating to immunity from diligence conferred by the Acts which allows that immunity to persist where the funds are held by bank in identifiable form is to be preferred. …” (At para.).
The current position
In the light of the above, the precise effect of the provisions in section 187 of the 1992 Act remains a live issue – upon which legal opinions may differ. But this means if someone wishes to know their rights under the law, they could receive at least five different answers, viz:
(1) The legal position is clear. State benefits are exempt from action to recover a debt where those monies can clearly be identified within an account. Hence the set-off is prohibited by section 187(1) of the 1992 Act and any charges resulting from the set-off are irrecoverable in law.
(2) The legal position is clear. Welfare benefit payments made into a bank account are no longer classified as state benefits and instead become subject to the rules governing bankers and their customers. The power to apply a set-off or to make charges where an account is overdrawn are actions which are both outside the scope of section 187(1) of the 1992 Act.
(3) The law is sufficiently clear to protect welfare benefits when combined with use of the first right of appropriation: Some Housing Benefit Authorities have provided tenants/claimants with a template letter to ensure that Housing Benefit payments are earmarked to pay the rent and are not therefore used by the bank to clear an overdraft.
(4) The law needs to be reformed. Section 187(1) of the 1992 Act indicates that welfare benefits, by their very nature, must not be appropriated by the bank to repay debts owed to the bank. However, the common law requirement to notify the bank that those benefits are to be allocated to a particular purpose – i.e. covering essential living costs – means that unless specifically instructed, the bank is free to use them to repay other debts. But this is against the spirit of section 187(1). What is required is a legislative provision that deals specifically with benefit payments received into a bank account that prohibits the bank from using their right of set-off against any benefit payment. See “Credit Where Credit is Due: Reforming a Benefit Recipient’s First Right of Appropriation“, by Emma Williams. This was an entry in the 2011 for the Bar Council’s Law Reform Essay Competition, when alongside completing her Bar Professional Training Course, Emma Williams was a Gateway Assessor for the Citizen’s Advice Bureau.
(5) The legal position is unclear, so a pragmatic approach should be adopted. The bank or building society’s attention should be drawn to the guidance in the Lending Code for banks and building societies when they are applying the right of set-off where the customer is in financial difficulties. The code says if a bank or building society uses the right of set-off, the customer should be left with enough money to meet their reasonable day-to-day living expenses and priority debts (Code at para.196). Otherwise, the individual should transfer payment of their welfare benefits to a basic bank account, that is, one which only receives money to pay bills and does not provide a cheque book or an overdraft.
In practice the issue is likely to present itself as a debt issue involving a dispute between a customer and a bank. However, it is clear from the above that the underlying issue raises a question of public law; namely what is the correct interpretation to be given to section 187(1) of the 1992 Act? This is a matter upon which the Administrative Court could be asked to make a declaration in proceedings by way of judicial review. The defendant bank could take a ‘backseat role’ and adopt the arguments of the Secretary of State for Work and Pensions, who would be added to the action as an ‘interested party’.
The argument that the statutory protection under section 187(1) of the 1992 Act covers benefits paid into a current bank account clearly has merit given the outcome in the ‘Scottish case’ (above). For whilst a judge sitting in England and Wales is not bound by a decision of a Scottish court, as the terms of the social security provision at issue are identical in both jurisdictions, then the judgment in the Scottish case is, at the very least, highly persuasive (Marshalls Clay Products Ltd. v Caulfield  EWCA Civ 422  ICR 1502, at -). Secondly, the claim has the potential to benefit many individuals beyond the person bringing the claim as well as to help clarify the law. In the circumstances, there would appear to be a strong public interest in the courts resolving this long standing issue.
Note: The issue was the subject of the BBC’s Money Box programme, broadcast on Radio 4 on 10 and 11 May 2014, in which Paul Lewis talked to Desmond Rutledge on “whether a little known law stop banks from taking charges from a customer’s account if the balance comes from benefits payments”. Click here for the podcast of the programme (the item starts at 18.25 minutes) or here for a transcript of the broadcast.