Money Insider: The end of free banking could be costly for all

At least a couple of times every year the doom-mongers declare that banks are going to start charging us for our current accounts, only for the claims to be forgotten a week later.

So what's different with the latest "free banking – the end is nigh" story?

Rather than the issue being raised by a consumer body or an industry commentator, on this occasion the free banking hornets' nest has been poked by Andrew Bailey, the soon-to-be-boss of the new Prudential Regulatory Authority.

Mr Bailey feels that free banking is a myth and encourages the mis-selling of products, singling out the PPI debacle as such an example.

He also wants to increase competition in the banking sector and believes that were the true cost of banking services visible, we'd see more customers switching accounts.

If you look at the issue from the banks' perspective, they provide us with branch networks, instant payment services, statements, cheque books, debit cards, internet banking and cash withdrawals from ATMs across the UK – and as long as you keep your account in the black it doesn't cost you a penny.

However, the main gripe over the years has been that the long list of banking services that many people get for nothing (and take for granted) is subsidised by stealth charges and high levels of commission from the cross sales of pension, life insurance and mortgage products.

Another bugbear is unauthorised banking charges, and even though these have reduced, in some cases the penalties are still excessive and it's quite easy for someone to accumulate £50 or more of charges in a single month.

There's also the matter of the hundreds of millions of pounds of credit balances held in current accounts on which the banks don't pay us a single penny. Will that change under the new regime? I think not.

I'm not sure what level of detail Andrew Bailey has gone into, but there are so many things to be considered if he wants to achieve his ambitious plan.

The questions that immediately spring to mind include: will the charging be on a fixed-fee tariff or a pay-as-you-go deal dependent on the number of transactions on your account each month?

Will the regulator put a cap on the amount customers are charged for unpaid cheques and unauthorised borrowing?

Does he expect all "in credit" and borrowing tariffs to be in the same format? This is not the case at present and makes it nigh on impossible for the man on the street to work out which bank offers the most cost-effective deal.

Will he insist that customers receive interest on current account credit balances, and what measures will he put in place to end the culture where bank staff are under pressure to meet sales targets in order to receive commission payments or bonuses?

Will the introduction of a new revenue stream mean we'll be rewarded with better levels of customer service, meaning fewer complaints to the ombudsman?

Although I can appreciate what Mr Bailey wants to achieve, I'm far from convinced that the vision will come to fruition any time soon.

If we end up paying for our bank accounts, I'm pretty certain we won't see a reduction in the cost of other financial products or services, and that by disturbing the hornets, many more of us will end up getting stung than the new regulator actually envisaged.

New best buy Isa from Virgin Money

With the cost of money market funds increasing due to continuing uncertainty in the eurozone, we're seeing more banks turning their attention to retail savings balances.

Among the best new savings rates over the past week is a one-year fixed-rate ISA from Virgin Money paying 3.3 per cent AER.

The account sits in the top three best buys, is available from just £1 and, unlike some competitors, it allows you to transfer balances from previous ISAs.

We may be heading out of the main ISA season, but this is an excellent deal and well worth a look if you haven't yet decided on a home for your 2012-13 tax-free savings allowance.

Locking away the maximum cash balance of £5,640 for a full 12 months will earn you £186.12 in interest – tax free.

Andrew Hagger – Moneynet.co.uk