Panel advocates use of set-off agreements

Banking lawyers should advise banks to use set-off agreements to protect their interests, the Financial Law Panel (FLP) says in a practice direction on security law.

The advice is on how banks can secure their interests against cash deposits without taking a charge – the most common way for taking security.

Lawyers favour a variety of ways for securing banks' interests. The FLP says the problem is that this diversity can be confusing to banks and other market participants.

The FLP is recommending lawyers' use of a set-off agreement should be viewed as the normal way to take protection of this kind. It recognises this method may not always be best, but it should be the first one considered.

FLP chief executive Colin Bamford, a seconded Richards Butler partner, says contractual set-off has become more common as a legal technique.

“Finance lawyers are now comfortable with it, and we feel that the time is right to recognise it as a major weapon in the banking lawyers' armoury.”

Cash in a bank's own books is one of the most attractive assets over which it can take security.

However a court ruled in 1986 that banks could not take a charge over a deposit made with itself and so would have to find other means of security.

The FLP is sponsored by the Bank of England and the City of London Corporation. It emerged from the Legal Risk Review Committee, set up to investigate issues of legal uncertainty.