End of free banking? Free current accounts 'should go' so High Street banks stop mis-selling, warns top financial watchdog
he United Kingdom should kick its habit of free banking so that the big High Street banks stop squeezing profits out of their customers elsewhere - that was the message from the country's top regulator today.
Britain's bank customers could soon be paying for their current accounts as standard, after the chairman of the Financial Services Authority warned that free current accounts for those in credit are harming competition among High Street banks and leading to mis-selling.
Lord Adair Turner suggested banking was 'at a cross-roads' in a speech in London today. His words carry extra weight as Lord Turner is among the front-runners to head a beefed-up Bank of England after the current governor Sir Mervyn King steps down.
No free lunch: The Chairman of the FSA Lord Turner (left) has told customers they may have to get used to paying for their accounts so that banks can pay for services such as cash machines without resorting to cross-selling.
During a gloomy assessment of the UK banking sector, Lord Turner said: 'We need to recognise a central problem in UK retail banking – the impact on competition of free-if-in-credit banking.'
He described how current accounts for those in credit with their bank were effectively being 'given away for free', even or sold below cost of production. The major banks have only been able to do this by cross-selling other products to customers.
This makes it difficult for new banks to enter the market and compete with the traditional giants, Lord Turner said, adding that the need to claw back costs from free banking could indirectly lead to poor value products and mis-selling.
He said it 'may be difficult for a new entrant to make a business plan stack up unless they assume the sale in some future year of high margin ancillary products – products which if we are not careful may be for both the incumbents and the new entrants, the next PPI'.
'Many who stay in credit get a good deal, subsidised by others who pay though, for instance, unauthorised overdraft charges and PPI insurance premiums', he said. 'It is not a sound basis for a long-term trust-based relationship between a competitive banking system and its customers.'
Lord Turner said the situation required critics - such as politicians, press and consumer groups - to recognise the flaw in this model and to resist accusing banks of profiteering when they try to introduce more transparent charging on current accounts.
Britain is relatively rare in offering free current accounts to those customers in credit. Other countries level a charge on customers to pay for the administration of accounts and for services such as cash machines. UK banks have managed to offer accounts free of charge by charging those with overdrafts higher interest rates, or through penalty charges.
These charges have already been at the centre of one scandal, when consumers began to use contract law to challenge their legality, leading to hundreds of millions of pounds being repaid to consumers.
Another method the banks used to help fund free current accounts was Payment Protection Insurance (PPI). Policies were sold as a way to cover repayments on loans and credit cards if the borrower was made unemployed.
However, the products contained huge profit margins for the banks and financially incentivsed staff sold many policies to people who could not benefit from them.
The resulting mis-selling has now resulted in billions being paid back to customers.
Lord Turner's warning on free banking came within a generally gloomy snapshot of the banking sector. He said that the sector was suffering because of chronic lack of trust.
He said that the rapid expansion of the UK's banks leading up to the crisis - with executives paid ever-increasing bonuses - was essentially based on a myth.
'Experts were on hand to explain that in some mysterious way ever more intense and complex financial activity was increasing the total size of the economic cake, with the prosperity of all enhanced, even if less richly than that of some bankers', Lord Turner said.
'That proposition was essential to the social acceptability, or at least the tolerance, of huge individual rewards. But we now know that it wasn’t true.'
The FSA chairman explained that financial services were far morwe likely to rip off consumers because customers cannot understand, or are not given access to, clear pricing information.
Lord Turner said: 'The car buyer is well-equipped to test drive different cars and select the one he or she prefers; the unsatisfied supermarket customer can take his or her business elsewhere.
'But individuals cannot test drive complex investment and insurance products: they rely on trusted providers to give explicit or implicit advice. And many purchases are too infrequent and too large to make switching provider an effective market discipline.'