End to free accounts looms as banks react to fee disquiet

Calls from regulators and consumer groups for more transparent charges may see us all paying for banking

The end of "free banking" could be nigh. According to the financial comparison site Moneyfacts.co.uk, there are 56 packaged current accounts which charge a monthly fee in the UK today, up from just 35 accounts in July 2007. In the autumn, Marks & Spencer will be offering its customers its first bank account with a range of brand-specific benefits, but costing up to £240 a year and Nationwide is also rumoured to be considering a new paid-for current account.

A senior executive at the Financial Services Authority has said there may be a need for regulatory intervention to force banks to charge for current accounts. While his intentions may be worthy, it may prove difficult for customers to stomach the argument from newly appointed Barclays chairman, Sir David Walker, who says if banks were able to charge for current accounts they might have avoided some of the recent mis-selling scandals.

Defending ripping off customers because banks aren't making enough money off them elsewhere isn't getting the debate off to a good start.

"It's a disgrace that the very people who bailed out the banks are being asked to pay more for the most basic accounts, while the industry continues to be rocked by scandals like PPI mis-selling, Libor rate-rigging and IT failures," says Peter Vicary-Smith, the chief executive of Which?. "Banks must be far more transparent about their fees and charges so that people can clearly see what they already pay."

Which? is calling for all banks to provide electronic information, making it easy for customers to see exactly what they are paying for their bank accounts, as well as portable account numbers to make switching banks accounts as easy as changing mobile phone provider. It has also said that the new regulator, the Financial Conduct Authority (FCA), which will soon replace the FSA, should clamp down on high or complex overdraft charges.

One line of argument is that an end to free accounts will be an improvement on the current system which sees banks using less than transparent charges and excessive overdraft fees to subsidise the cost of accounts for in-credit customers. Lloyds TSB, for example, charges £5 per month for authorised and unauthorised overdrafts, plus £10 a day for unauthorised balances over £25.

The fact is, free banking is not actually free – some customers pay as much as £900 a year in bank charges for going overdrawn for two days a month without permission.

Even an authorised overdraft can be costly with banks such as RBS/NatWest and HSBC charging an annual percentage rate (APR) of 19.9 per cent. If you want a better authorised overdraft rate, chances are you will have to pay for it in some way.

"While some customers may not have to pay a fee, they may be required to fund it to receive a lower overdraft rate. More often than not the customer will be penalised if they do not fund their account," says Charlotte Nelson from Moneyfacts.

The problem, some experts say, is that if we all have to start paying for current accounts, there is a risk that banks will be more reluctant to offer overdrafts because they will then be able to boost profits with the money made from all in-credit banking.

Even worse, if their greed wins out, they may simply continue with expensive overdrafts on top and we could end up replacing one faulty product with another.

"If they do introduce a charge, what will they do with unauthorised fees?" asks Andrew Hagger, a personal finance analyst at Moneycomms.co.uk. "I would hope penalty fees would be cut, but I wouldn't bank on it and we could end up with the worst of both worlds."

Looking at existing packaged accounts, some do offer decent interest-free overdrafts along with extras such as travel insurance, car breakdown cover and mobile phone insurance. This may be appealing, but unless you use all of the benefits on offer, it is usually much cheaper to stick with a free account and buy the products separately.

Even worse, you may simply not be able to use the extras included, for example, travel insurance may have an upper age limit which excludes you from cover, or you may not be eligible for all of the policies.

To combat this, the FSA has announced new rules forcing sales advisers to check whether each customer is eligible to claim under any insurance packages and is suitable for any policies included, which should help to avoid any mis-selling issues. These rules are due to come into force next March and even tougher rules could be introduced later in 2013, but they are still a worrying trend.

If the solution isn't paid-for accounts, the onus is on customers to vote with their feet and make the effort to switch to the right account for their specific needs. You may already be able to get many of the benefits included in packaged accounts without paying a monthly fee. For example, the Nationwide FlexAccount offers free travel insurance for Europe and the Halifax Reward account pays £5 for every month you deposit at least £1,000 (although its overdraft fees are steep, so avoid like the plague if you are ever overdrawn).

At the same time, don't tar all packaged accounts with the same brush. The "Privilege Premier" account from Co-operative bank seems pricey at £13 per month but it does offer a very comprehensive package with a £300 interest and fee-free overdraft facility, RAC breakdown cover for UK and Europe, worldwide multi trip travel insurance (with cover up to age 79) and mobile phone insurance for up to four smart phones.

"Just because some accounts appear more expensive, the package of benefits can far outweigh cheaper alternatives and could be good value for money if you're going to make use of most of the elements on offer," says Mr Hagger.