Call to end free bank accounts

Banks must be told to stop offering free current accounts if Britain wants to stamp out mis-selling scandals, a senior regulator said today.

Andrew Bailey, executive director of the Bank of England, described free banking as a "myth" as it distorts the supply of banking services and encourages banks to push up fees elsewhere in their business.

He said regulatory intervention may be the only way to bring about change as it would be hard for a single bank to break ranks without losing business.

Millions of Britons still enjoy free banking and there is likely to be a furious reaction at any attempt to introduce fees for standard banking services, even though other European countries generally charge and it could mean lower costs for other services.

Mr Bailey said: "I don't think we will have a retail banking industry that is properly serving the interests of the public until we tackle the dangerous myth of free in-credit banking."

He believes the price of banking to consumers varies too much depending on the services they use.

In his speech to the Westminster Business Forum, Mr Bailey added: "I also worry that the banks may not properly understand the costs of products and services they supply.

"And I worry also that this unclear picture may have encouraged the mis-selling of products that is now causing so much trouble."

The banking industry is currently paying out billions of pounds in compensation to customers mis-sold payment protection insurance.

Mr Bailey added: "It is hard for a single bank to break out of the existing situation without appearing to raise the price of its service to customers.

"And, it is hard for the industry as a whole to break out without appearing to collude. So, it may require intervention in the public interest, not least because it is a way to encourage greater competition."

Mr Bailey is in line to supervise Britain's banks as the head of the new Prudential Regulatory Authority.

The British Bankers' Association said it planned to hold talks with Mr Bailey as part of its ongoing review of the issue.

Chief executive Angela Knight said: "As the industry's next chief regulator, Andrew Bailey will have chosen his words carefully.

"The UK is unique in its current free banking model: customers who keep their account in credit do not expect to pay anything extra for their normal banking services.

"In other countries, both in Europe and elsewhere, either customers pay a fixed amount each month or there is a levy depending on the number of transactions that they undertake, plus similar costs to the UK for additional services such as unarranged overdrafts."

Consumer Focus chief executive Mike O'Connor said: "The fact that banking isn't really free is one of our worst-kept secrets.

"Most people pay indirectly either through penalties or lost interest, depending on whether they are in the red or the black.

"There would be real value in establishing a more open and honest relationship between banks and their customers on what they get, how much it costs and whether others are offering better value for money.

"What must not happen is that consumers end up with the worst of both worlds - paying for accounts but still enduring unfair charges, opaque and complex products, mis-selling and poor customer service."

Chris Leslie, shadow financial secretary to the Treasury, said: "Millions of ordinary bank account customers will be concerned by these comments from the Government's new financial regulator, as they seem to suggest that the banks should be encouraged to charge customers for the privilege of in-credit current accounts.

"It's vital that George Osborne's new regulator is on the side of ordinary savers, who trust the banks with their money and who allow the banks to use their deposits to make a profit to cover the costs of their free current accounts.

"Pensioners with modest savings and hard-working people who take care to avoid going into the red will be extremely concerned at the prospect of having to pay around £15 per month for basic deposit, cheque and transactional services.

"We need a regulator that stands up for ordinary bank account customers. The Treasury should send a strong signal that actively encouraging charges for current accounts would be unacceptable."

PA