Free banking should end, says FSA head Lord Turner
Quote: Britons' free bank accounts represent a flawed system which damages banking, says the City regulator who is a frontrunner to govern the Bank of England.
The industry model, offering free accounts to customers who are in credit, stifles competition, warned Lord Turner, chairman of the Financial Services Authority (FSA), He signalled that regulators want an end to the 28-year practice.
“We need to recognise a central problem in UK retail banking – the impact on competition of free-if-in-credit banking,” he said in a speech in London. “One important barrier to competitive entry into UK personal sector banking is obvious – the fact that the core product, the current account, is usually given away for free, sold at below cost of production.
“It is not a sound basis for a long-term trust-based relationship between a competitive banking system and its customers.”
Britain is one of the few countries where customers do not pay a fee for their current accounts. Instead the banks claw back the bulk of the costs of providing branches, online services and cash machines through heavy penalties for customers who go over their overdraft limit or bounce a cheque, as well as through other services.
This can make it difficult for a new entrant to make a business plan “stack up”, said Lord Turner, unless they offer high-margin side products, such as payment protection insurance (PPI), which sparked a mis-selling scandal.
His comments will fan fears that regulators want to phase out free banking, coming after the Bank of England’s Andrew Bailey, chief executive-elect of the Prudential Regulatory Authority, said in May that free banking was a “myth” that encouraged mis-selling.
Chris Leslie, Labour’s shadow Treasury minister, said regulators should protect the system, however.
“When banker pay and bonuses remain so high, many ordinary bank customers will be astonished at any move to hit their current accounts with a new fee,” he said. “The free in-credit deposit account needs to be defended; banks can generate significant profits from the money that they hold on our behalf.”
Sarah Brooks, director of financial services at Consumer Focus, said the problem with the current system is that those customers who benefit are being indirectly cross-subsidised by the fees and penalties paid by others who go overdrawn.
"There could be a case to be made for charging for bank accounts, and it is something which should be up for discussion," she said. "Unfortunately without big changes in banking we fear that nothing will change apart from consumers paying more for current accounts.
'If free banking does end, consumers mustn't be hit with a double-whammy - paying for accounts but still facing the unfair charges, opaque products, mis-selling and poor customer service which currently dog retail banking."
Lord Turner also said that City watchdogs could not have uncovered the Libor rate-fixing scandal in its early stages, as the level of scrutiny needed to uncover it would have been “prohibitively expensive”.
He would not comment on whether the authorities could have been more alert to the later “low-balling” of Libor submissions in the 2007 to 2008 period, to improve how banks were seen in the markets.
He added that he did not “rule myself out” to succeed Governor Mervyn King at the Bank of England next year.
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