Jeremy Warner Outlook: With profits still booming, can banks really get away with charging for current accounts?

Are we about to witness the end of "free" banking? The last time one of the big high-street banks tried to start charging for a previously "free" service - use of its ATMs by the customers of rival banks - it turned into a public relations disaster and the bank was soon forced to beat a hasty retreat. The man who tried to do it was John Varley, then head of retail banking at Barclays and now chief executive of the whole shebang.

He's this morning expected to unveil a rise in annual pre-tax profits of nearly a third at Barclays to a new all-time record. Much of this growth will be down to corporate, wholesale and overseas banking, together with some one-off profits on disposals. But that's not going to stop the usual chorus of condemnation about big, bad profiteering banks.

Growth in banking profits has started to come predominantly from fee-based corporate and securitisation activity. With rising impairment charges, the boom days of UK retail banking seem to be over. Yet revenues and profits in retail banking are hardly in a state of collapse.

To the contrary, they are still growing, if not at quite the same pace as a few years back. Returns, which across the industry as a whole may be as high as 20 per cent, remain at a level regulators would normally regard as "excessive" for a mature, and supposedly competitive, market place. In other words, there may still be some kind of a market failure going on.

Rightly or wrongly, the UK banks claim to be among the cheapest in the world. If they are also among the most efficient, then this is not necessarily inconsistent with high rates of return. For the Government's part, Treasury ministers tend to be quite ambivalent when it comes to high banking profits. It is obviously better to have a healthy banking system, capable of taking economic shocks in its stride, than a financially weak one. The fact that banking is also a big source of corporation tax to the Government may make decent levels of profit doubly desirable.

Even so, an industry already earning what may be regarded as "excessive" rates of return isn't going to find it easy to sell the idea of charges for current accounts, ATMs and transactional banking such as direct debits.

Higher interest rates are already likely to generate a big windfall for banks this year on top of usual profits. Most banks pay next to nothing on their current accounts. Rising interest rates mean they can lend this "free" money for more. According to banking analysts at Credit Suisse, if interest rates were to rise to 5.5 per cent, it would add around £1.5bn to total banking profits this year. Do banks really need to start charging for current accounts on top?

The reason current account charging is once more a debating point - as our front-page story highlights - is because a regulatory crackdown is threatened on other forms of hidden charges, and, in particular, the usurious charges levied on unauthorised overdrafts.

The Office of Fair Trading has already judged such charges to be illegal when applied to credit cards. It may be about to do the same with current-account charges for unauthorised overdrafts, which are a much bigger source of profits to the banks. The consumer lobbying group Which? has estimated that these charges are worth £4.5bn a year to the banks. The City says much less - possibly no more than £1.5bn. But whatever the figure, banks would plainly seek to recoup these profits from elsewhere if there was a crackdown by the OFT.

Phase one would be the introduction of monthly or quarterly charges for the use of a current account. Phase two might be that of charging for direct debits. Then finally, free use of ATMs would disappear too. There is of course plenty of posturing in these threats. The industry is warning regulators not to be too harsh, or suffer the consequences. Yet actually, there is some merit in the bankers' case.

Abolition of the "hidden charges" and their replacement with fully transparent charges which consumers can easily see when they are buying the product would not only be a fairer system, it might also mean that "excessive" retail banking returns would be more easily competed away to normal levels.

In any case, among the banks at least, the dam is breaking. Nobody wants to be first in imposing current account charges. Yet even Nationwide, which has made huge marketing and political capital out of past pledges to stand by the "free" banking model, now seems to be changing its tune. If the industry moves in that direction, says Graham Beale, chief executive in waiting, then Nationwide will follow.

Might Barclays lead the charge? That's unlikely to be what Mr Varley says today. But it may be only a matter of time.

Pru to rule out sale of UK operation

Few in the City believed that Prudential could ever be persuaded to part with its founding UK business and, as our story on page 36 reports, not to sell is virtually certain to be the outcome of a year-long strategic review when its conclusions are reported with the full-year results on 15 March.

The clue to this outcome was in the news first reported in The Independent a little while back that Prudential had begun looking for a "policyholders' advocate" to adjudicate on the division of the inherited estate between policyholders and shareholders. This would have been a pointless exercise had Pru been planning to sell, as it would not have been allowed to realise any of the surplus capital for alternative purposes if it no longer owned the company.

Even so, the Pru will have to take radical action to justify keeping a business which has been underperforming both the UK industry and the company's own stellar performance in the Far East and America. Egg has already gone. The logical thing might have been to get rid of the rest of the UK business too.

This would have been a mistake, for it would have been only to give away the long tail of personal pensions business now about to start maturing into highly profitable annuities. The problem with the UK operation is that Pru has been trying to operate on too many fronts. Much of the product range has been generating poor or even negative returns - particularly traditional pensions and endowment business. Strip these out, and there is a decent growth business left in there somewhere. Mark Tucker, the chief executive, is unlikely to be sentimental about it.

If the UK business is not for sale, what about the company as a whole? Aviva has already tried and failed. HSBC has said it wants a quarter of its revenues eventually to come from insurance. If it wasn't in such a state itself, Prudential would be the obvious target.

BT taps into Rake's progress

Sur-pri-se. No, not Lord Browne of Madingley, or indeed any of the names that have been associated with the soon-to-become vacant position as chairman of BT Group. Instead, the BT board has opted for Sir Michael Rake, the present international chairman of KPMG. He was on nobody's radar screen, though the spectacle of Sir Michael deep in conversation with Ben Verwaayen, BT's chief executive, at the recent World Economic Forum annual meeting in Davos, should perhaps have given the game away. Accountancy and telecommunications may seem worlds apart, but in fact BT and KPMG have much in common; they are both big, global organisations which sell business services to international companies.

As such, Sir Michael makes a worthy successor to the present incumbent, Sir Christopher Bland. There is scarcely a major business leader in the world he doesn't know. Sir Michael joins a company which has been brilliantly repositioned for the modern world. BT was essentially bust when Sir Christopher took the wheel. The manicured lawn that he leaves behind is something that both the City and Sir Michael have much to be grateful for.

j.warner@independent.co.uk

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