Banks could be gearing up to pile on the charges misery for millions of customers as they look to recover the estimated £10bn cost of the payment protection insurance (PPI) mis-selling scandal, financial industry insiders have warned.
The price of mortgages and other loans could be set to rise; savings rates cut and even the imposition of charges for traditionally free current-account services could be considered by some of the UK's top banks.
"It's logical, if you squeeze banks' profitability in one area it will simply pop back up in another. So take billions of pounds from the banks as a consequence of PPI and they will look to recover some or all of that cash elsewhere," said Kevin Mountford, banking expert at price-comparison service Moneysupermarket.com. "This is what I call the waterbed effect."
Before the surprise victory in the Supreme Court over unauthorised overdraft fees in late 2009, it was rumoured that a host of banks was preparing to charge for current-account services such as issuing a bank card or clearing a direct debit. Previously, Phillip Williamson, former chief executive of Nationwide, had publicly stated that he thought that a monthly standing charge for current accounts would happen if banks were forced to return billions in current-account overdraft fees.
However, the Supreme Court came down in favour of the banks, and the idea of charging for current-account services was shelved, at least temporarily. But now, with the bill for compensation over PPI likely to be huge – Lloyds, the country's biggest bank, has set aside £3.2bn – the idea is once again gaining traction in bank boardrooms.
"Each bank has a very different level of liability over PPI, with Lloyds at one extreme and HSBC with some £250m of exposure at another. Nevertheless, this could be the motivation for banks to reassess what they provide free in the future," one senior banking executive at one of the UK's big four banks, who wished to remain unnamed, told The Independent on Sunday.
"In some respects this idea has never gone away," said David Black, a banking analyst from financial information firm Defaqto. "We are pretty fortunate in this country, there are lots of services we get from our banks which are charged on the Continent as a matter of routine."
Mr Black thinks it's more likely that banks will look to push their current range of fee-charging accounts more vigorously, rather than simply starting to charge all their customers. "These packaged accounts are real moneyspinners. What we may also see is certain products such as loans and credit cards only being made available to a bank's own current-account base.
"The idea is for the banks to make the most that they can from their current-account customers and be sure of the financial position of the person taking out their loans and credit cards," he said.
Another possibility is that banks will continue to cherry-pick customers, in effect showing non-profitable customers the door or charging them a monthly fee: "First Direct did this a few years ago, where it said that if you didn't pay in a certain amount of money each month or have a savings account or mortgage with it then you'd be charged a monthly fee for your current account. Such a practice could become widespread. It's charges by the back door," Mr Black added.
The "waterbed effect" could also lead to more expensive loans and lower savings rates. However, said Mr Mountford: "There is a limit to how much money the banks can recover through higher loan or lower savings rates. Take savings, there is huge competition out there for depositors' cash.
"All in all, this makes it more likely that scenarios, such as PPI compensation, are going to ultimately lead to current-account charging. It is going to happen sooner or later."
As for likely candidates to introduce charges, Mr Mountford reckons the part-nationalised banks could be in the forefront: "Lloyds and RBS have been hit badly by this so I can see them making the first moves. I don't think Santander would be first as it is focused on grabbing current-account market share. But if one bank decides to go for it then you can bet the others would follow suit in double-quick time. I can see a massive hoo-ha, but if it happens consumers are going to have to be smart and shop around," he added.
After initial falls in banking share prices, market watchers do not seem too concerned about the hit they will take from PPI, mainly because of banks' ability to repair their balance sheets. For instance, Nicolas Ziegelasch, analyst at brokers Killik & Co, reckons that despite the massive £3.2bn PPI war chest set aside by Lloyds the bank still represents good value.
"Given it has provided fully for PPI, has higher provision coverage of Irish loans and is a UK-focused bank, we would see the current low share price as a long-term buying opportunity."