Hello
You are correct, the LA is wrong. I had exactly this problem and I took legal action against the LA and they immediately paid me the direct payment into an account I control. I can help you with this if you need help. Formal complaint → Ombudsman (waste of time but you may have to do it) → Judicial Review. Might be able to skip the ombudsman.
See here for a complaint letter: Ask permission before, or check up afterwards? - #13 by Josh
Josh