Account fees: banks go back to 'Life on Mars'

Charges on balances in credit started going out in 1974. Now one provider is bringing them back

The phones rang red-hot and angry at First Direct bank last week.

Thousands of people bombarded its customer service lines to protest at the introduction from February of a £120-a-year fee payable on some current accounts.

"It's too early to tell [how many are closing their accounts in protest]," said a bank spokesman, "but obviously the numbers will be looked at and assumptions have been made."

First Direct, part of banking giant HSBC, admits it is "making a bold move". It's not wrong.

The bank's decision to impose a monthly £10 charge on ordinary current accounts will affect as many as 195,000 customers.

Free banking will still be available if certain conditions are met. First Direct's demands are simple: pay in a monthly salary of at least £1,500 (which means earning roughly £26,000 a year before tax) or maintain an equivalent average balance during the month, and customers will be spared the fee. For those who can't comply with this, there is an alternative: take out one of First Direct's products, such as home insurance, a credit card or personal loan.

Otherwise, you'll have to go elsewhere to avoid paying bank charges.

First Direct's chief executive, Chris Pilling, says that the bank has 40,000 dormant accounts (showing no movement for at least three months), and a quarter of a million accounts where there are fewer than 10 transactions a month.

These all cost money, he stresses. The focus will now be on those customers who use the bank most.

With the median national wage standing at £23,580, according to the Office for National Statistics, First Direct's new policy will exclude plenty of potential customers.

The price-comparison service Uswitch.com says First Direct's insistence that customers buy "linked" products or pay bank fees is in effect a "deterrent to shopping around" for the best value - hardly a consumer-friendly approach.

The question on the lips of industry insiders now is, "Who's next?"

Asked about their commitment to free current accounts, the big names on the high street - including Lloyds TSB, which has more customers than any other bank - made it clear they had no immediate desire to change the status quo. But most emphasised that no organisation could ever rule such a move out.

"We have no plans to introduce any account usage charge," says Philip Williamson, chief executive of Nationwide building society, "but you can never say never. It's what everybody else does that matters."

Current accounts aren't free for banks to provide, he stresses, and most consumers will be able to make up their own mind. "If you are a relatively modest earner, £120 a year is quite a lot for a basic banking service. But everyone has a choice, and that's the way the market operates."

Until October 2005, Alliance & Leicester deman- ded that customers keep at least £1,000 in its internet-only current account. But A&L decided to slash this minimum to £500 after finding, in the words of a spokesman, that it was "excluding too many people".

And many specialists think annual fees on current accounts are unlikely to be widely imposed, as UK banks are still fighting one another for market share.

"This problem is pretty much unique to First Direct," says Stuart Glendinning of the price-comparison website Moneysupermarket.com. "The current account market is too competitive for the other banks to introduce charges."

In an attempt to win market share - and, critically, cross-sell other, more lucrative financial products - banks have been busily promoting their current accounts to lure consumers away from rivals.

The Halifax, for example, offers a debit card that pays 1 per cent cashback (up to £100) on purchases, while A&L offers 12 per cent on a regular savings account if customers switch to their current accounts.

But if First Direct's move is a success, other banks will certainly be watching.

The Office of Fair Trading (OFT) is in the process of investigating default charges on current accounts, and is considering whether to limit the penalties - currently as high as £38 - imposed on those who go into the red. If the OFT does rule against the industry, most banks are expected to try to recoup the resulting loss of income in as many ways as they can.

No bank has charged for the simple use of a current account in credit since 1984. But free banking really began 10 years before that when Midland allowed any customer who was £50 in credit for six months or more to bank for free. The industry has since sought other ways to make a profit from consumers.

David Lascelles, joint founder of the Centre for the Study of Financial Innovation, a think-tank, believes customers might accept the reintroduction of charges if they are clearly explained and transparent.

"At the moment, there are more [bank] charges elsewhere that anger consumers," he points out.

Current accounts might be free in the UK but in France and the US, for example, it is usual for customers to pay a monthly fee.