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John Howard: The regulator must end free banking

John Howard MM blog

The new chairman of Barclays, Sir David Walker, is just the latest senior City figure to come out against free personal bank accounts. In the last few months we have also had Lord Turner, the FSA chairman and contender for next governor of the Bank of England, describing free-if-in credit bank accounts as a “central problem in UK retail banking”. Martin Wheatley, chief executive designate of the Financial Conduct Authority said free banking is an “outmoded concept” and “doesn’t really work’, and Andrew Bailey, head of the FSA’s prudential business unit, added: “I think that the reform of retail banking in this country cannot move ahead unless we tackle the issue of free in-credit banking”.

Free banking is disliked by these senior figures because it means customers don’t really know what it costs for the banks to offer us their core product. Instead the banks subsidise personal current accounts in a number of ways. First with high charges and interest for going overdrawn, which often leads to competent and solvent customers being subsidised by those who are poorer and less organised. Second, free accounts have been subsidised by aggressively cross selling other products like payment protection insurance, the misselling of which the banks are still paying for.

So it certainly looks like the writing is on the wall for free banking except that, despite all the comments against it, nobody seems to be doing anything to change it. The reasons are fairly obvious. No single bank can go it alone and scrap free banking because its competitors would clean up. Then there appears to be no appetite amongst the main high street banks to do it collectively and there may be Competition Act problems if they did. The regulator meanwhile does not find the idea of outlawing free banking attractive because it would be unpopular with so many consumers. Ditto the politicians.

The banks have tried the much more subtle approach of offering packaged current accounts which charge a monthly fee but throw in various insurances, VIP airport lounge access or music downloads as a sweetener. They have been very successful in migrating many millions of people onto these accounts but the regulator has now put a dampener on them, issuing guidance about their suitability after becoming concerned that packaged accounts themselves were being missold.

So how is the market going to be moved to a position where free banking ends and current accounts are properly priced to reflect the cost of providing them? It can only really be done by the regulator, and I think the lengthy list of senior regulators making comments suggests they also recognise it’s up to them.

But it still begs the question how they might achieve this major change in banking without upsetting too many customers? Could it be the last dying act of the soon to be defunct FSA, leaving the way clear for the new regulators, the FCA and the PRA, to emerge blame free next April? Or will the new regulators take the opportunity to make a fresh start with a courageous first move to do what they think is right, rather than what is popular, and setting a clear new course for the regulation of financial services?

John Howard is a former chairman of the FSA’s Consumer Panel and a Special Advisor to Huntswood


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There are 33 comments at the moment, we would love to hear your opinion too.

  1. what nonsense. Unless our regulators are trully going to become price regulators how is this to be achieved ?

    not to mind the ” why is it needed ? “. The justification that it is needed to stop mis-selling of poor products is very hard to swallow. I can understand the message that banks need to rebuild their balance sheets, and even the message that we all have to pay for this ( whether we like it or not ), but not the one that free banking has a causal impact on behaviour

  2. Great idea! it will allow the banks for charging us for being sh@fted.

  3. “Free banking” only applies to those always in credit and even then, they pay by the margin between the interest on savings against the interest applied to borrowers.

    If Banks acted as Banks rather than flogging all the rubbish that they dress accounts with then surely its just a bit of maths to work out what an account costs, which I doubt they even know themselves. After all, the basic technology is there (albeit out of date and plainly useless) but the clearing system works. Cheque books are a rarity, statements not really necessary if you have online banking… and then do we really need all the branches.

    The truth is there is no real determination to do anything well, other than apply another set of fees. if they had half a braincell between them they would colaborate and offer counter services in one branch rather than the 4-7 on every high street. Most of them use call centres for most “personal banking” and bar retailers that drop off the days takings, the odd holiday money request, who even visits a bank these days?

    Rather more radical thinkning than simply charging a monthly fee for an account, but thats precisely the sort of gutless British Bank thinking that exists.

  4. So is it up to the regulator to dictate whether a service should be free or chargeable? Surely, this is something that should be driven by supply and demand and something each individual organisation should decide.

  5. Given the choice of depositing money into a bank and then paying for the privilege of accessing it or putting money under the mattress for the same return, I wonder what people would be more inclined to do.

  6. Graham Pattinson 20th August 2012 at 3:18 pm

    Well the likes of Sir David Walker, Lord Turner and the FSA don’t like free banking, but I am quite happy with it. I am sure that most ordinary folk are too. I don’t think it was the cause of the financial mess the banks got us in so why not leave it alone please and concentrate on actual problems. Possibly very wealthy individuals like Walker, Turner, Sants et al are happy to pay charges just like they are happy to pay for investment advice under RDR but in the real world Joe Public may think differently as his pockets are not bottomless!.

  7. What drivel !!!!

    I hope you get what you wish for !!

    Not only will the FSA/FCA be hated by everyone in this industry but every client of every IFA and every client of every bank, good job well done !!!

  8. I am bemused. On the one hand we have a key aparachik at the FSA saying free is bad with regard to the banks, but as far as any IFA is concerned his organisation is pumping us with propaganda that we should run everything for free.
    Am applying for my regisatration No. at the charities commission in preparation for RDR.

    The same tosh is spouted at unit trust and pension providers.

    Could this joker be on a fast track to a sinecure at a leading bank, having set them up with a monster income stream from retail customers.
    I think we should be told.

  9. Yeah, I heard the Barclays chief claim the recent banking scandals are partly down to the fact that people enjoy free banking. Bulls**t.
    To suggest that banks wouldn’t have resorted to PPI mis-sales if they’d been able to charge £5 per month for current accounts is like saying drug dealers wouldn’t cut cocaine if the street price was higher.
    Greed doesn’t know any limits.

  10. What a silly idea…. these brainstorming sessions always come from people that don’t live in the real world. Lets hope the sir part was for something worthwhile. The fact that banks were cross-selling wasn’t because they were trying to make up the shortfall, It is pure greed that the banks have and that isn’t going to change overnight!!!

  11. Given the continued disgraceful behaviour of our banks, and the lack of trust the public holds for them, wouldn’t it be just the thing for them now to start charging us for this corruption and ineptitude!
    That aside, a worrying theme coming through, from commentators who really should know better, is a message that somehow the banks have been justified to behave in the manner they have, simply because they haven’t been able to charge their customers for basic banking services…

  12. If these are the people who puport to run things no wonder the country is in a mess!

    True to form John Howard hasn’t the first clue of the views‘at the sharp end’. He – like the regulators – lives in a rarefied little world seemingly divorced from reality. I speak as a bank customer and a financial adviser.
    I will not have a bank account – whether personal or business – that charges a fee. I have had ‘free’ banking since Noah was in short trousers. Every time a bank thought that they would levy a charge for having my money – I moved.

    This whole topic seems to be enveloped by spin and misinformation.

    There never has been ‘free’ banking. For those in credit the interest rate paid has (if at all) been derisory. Therefore the banks use our money while paying around Zero to 0.2% interest and lend it out at around 14%.

    That those in debt with loans and overdrafts pay for this facility seems perfectly reasonable. Consider that without the savers (who generally outnumber borrowers 3:1) the indebted would not be able to avail themselves of the facility.

    That the ignorant and gullible have been inveigled into buying rubbish products is not an excuse to charge the prudent for using our money.

    If the clearing banks fondly imagine they can start charging the prudent for handling their money they may well be in for a shock. Unless we are going to have a command economy there will be a new entity (Metro Bank – or some such) who will offer ‘free’ banking for those in credit. Indeed we can utilise a credit card to pay for everything (We are the people who pay it off entirely each month – therefore incurring no charge). Deposits can be paid straight into a no charge high interest account – how will the high street banks like that!
    As it is with the advent of internet banking most high street current accounts are merely for petty cash, while the ‘meaty’ amounts get transferred to higher interest paying accounts elsewhere.

    Nowadays interest rates of 3.2% – although still poor by historic standards and compared to inflation – are not uncommon.

    The other danger of course is that the fee for the account will include all sorts of extraneous benefits which are not asked for or required and which may well at some future time be categorised as a mis-sale.

  13. What complete and utter Bull@@@t! If people are charged for having their own money then they should walk. The problem is that the Banks are arrogant enough to know this won’t happen. ANY regulatory figure should be ashamed that they are supporting the legalised sh@fting of the general public – as if we haven’t already been b@ggered beyond compare.

  14. The Banks have made huge losses because of their Casino investing activities. They are now receiving huge fines because they have first of all cheated their customers by miss-selling and cheating on the LIBOR figures. They are also receiving huge fines for flouting the Money Laundering procedures. They now seek to justifiy these activities by saying they are not charging us for ‘free’ banking. They make a margin by ledning at a higher rate than it costs them to take the money in. If they charge for taking the money in then will they reduce the cost of borrowing? Of course not, it is just an excuse to rip us off again.

    I have yet to see any Banker being personally fined or imprisoned for these at best dubious and at worst illegal activities. At the same time they pay themselves huge salaries and bonuses. Paying for banking is just another rip off from which they can can continue to pay their outrageous salaries and bonuses.

  15. I would like to report this article as being both unsuitable and offensive. I have never read so much bo**ocks in my life. This is equivalent to my suggesting that because I give to charity (free banking) I am justified in ripping everyone else off by dubious and illegal practices. Do these people not think before they go into print?

    I see the author of the article is an ex-regulator and this explains a great dea labout the failings of the FSA.

  16. Paul S, Cardiff 20th August 2012 at 4:58 pm

    Brilliant, accurate and often amusing set of comments

  17. Larry in London 20th August 2012 at 5:28 pm

    Yet again we have a bunch of regulators and the would-be Great and Good telling the public what they should have.

    When will the regulator (and all that cling to their coat tails) realise that retail financial services is all about GIVING THE PUBLIC WHAT THEY WANT. Repeat, what THEY THE PUBLIC want. Not some nerd’s opinion whilst engaged in public competitive piety for the Most Holy Regulator Award.

    The public don’t care a damn about how much their back account costs to run, just as they don’t give a monkey’s wotsits how much tax is included in the cost of a gallon of petrol to pay for the myth of ‘free healthcare’. They can do little about either, so the only thing they care about is whether they can afford it.

    The regulators seem to be going around in ever-decreasing circles into regulatory oblivion and taking the industry with them.

    WAKE UP – All this nonsense they are spouting is PAID FOR BY US. When they start treating the industry fairly, that’s when we’ll listen to anything they have to say but until then we’ll simply ignore them. What a terrible state of affairs. What a bunch of tossers.

    Love and kisses,


    (soon to be Lord Larry of Lumbledown – sshhhhh…. don’t tell anyone – this can be our little secret…)

  18. Charging for bank services will only be justified if the banks bring down their extortionate interest charges averaging 18% on overdrafts and credit cards – which of course they won’t do. However, if there were a menu of charges – x amount for clearing a cheque etc – it might encourage the luddites to move to internet banking and allow the banks to streamline their branch networks and call centres.

  19. sHEETAL sHEETAL 20th August 2012 at 5:38 pm

    I thought the banks made a turn on a zero interest cash deposits rather than ie they get the spread when the make o/n depos at LIBID and pay us nothing

    With internet banking etc and the large profits they made during the boom why talk about ending free banking also if this does happen what about all those without bank accounts so we are expanding the exclusion zone for our society.

  20. Classic lefty codswallop from a man who cites his twin heartthrobs in his opening paragraph.

    Free current account banking is primarily subsidised by people earning zero interest on positive cash balances. Actually the more one has in a current account, the more they provide the subsidy.

    Oh God, no! Rich subsidise poor, shock horror! No wonder the FSA and its half-ar$ed consumer panel can’t bring themselves to mention it.

    As I’m loaded, bring it on, because I’m sick of subsidising poor people through getting no interest on me current account. And the FSA are about to give me the free license to kick these paupers in the teeth. Fantastiche. I just love it when the dim can’t work out why good ideas in their head never translate to good ideas in practice. Don’t they have IQ tests for these posiitons? Seemingly not.

  21. I despair of these people.

    How does one apply to get on this particular regulatory gravytrain where one gets well paid and able to make stupid, ill-thought out, decisions that ruin other peoples lives and businesses.

    When the revolution comes…

  22. So now, the banks not satisfied with ripping us off want to add more to their profits. The fat cats at the FSA and all the other prunes want their pennies worth. What is wrong with offsetting some profits from one area to another? We have been subsidising small clients, with earnings from the wealthier clients for all my 30+ years in financial services. The powers that be have managed to reduce our numbers from around 250,000 down to approx. 27,000 at this time, keep on like this and there will be no one to get advice from and as for the banks we cannot keep our money in cash due to all the money laundering laws what a huge stitch up. Sorry to say clients must be a dirty word as can take more money off customers the banks have been doing it for all my life.

  23. Terence P.O'Halloran 21st August 2012 at 9:02 am

    Adair Turner, David Walker and John Howard; all consumerist, left of centre, abject failures in regulatory circles and : we should listen to them?

    I think not.

    The ‘boys own circle of left leaning – no real commercial nouse club’ is trying to muddy the water yet again.

  24. Why should those who remain in credit subsidise those who are not (many of whom a high earners – dont make the assumption they are low earners) by the removal of ‘free’ banking?

  25. Jeez, the tidal wave of frothing-at-the-mouth ignorance here is astonishing. This must be where Daily Mail readers hang out. Let’s get this straight. Current account banking is NOT free, no matter what your bank tells you, and no matter what you think. You are just being conned. Even if you never go overdawn, you are still paying by being given nugatory interest. Or paying ridiculous fees for foreign currency. And so on. Got that? Isn’t it amazing how many people want something for nothing eh? An all-singing, all-dancing bank account, but for which they must never pay!

  26. Come on, the banks need to take ownership for messing up. Stop tring to look for a scape goat.

  27. @ Ian 12:03pm
    Free – Adverb: Without cost or payment.
    Redefining the meaning of words does not make you right and everyone else wrong. Perhaps in your next bank staff meeting you could discuss redefining “daylight robbery” too. Just a suggestion.

  28. I had the misfortune of hearing John Howard on Five Live this morning spouting this nonsense. Fortunately he was completely defeated by the ex-head of retail banking at Lloyds who pointed out that a charge would simply be seen as a tax that had to be paid. It was also pointed out by a caller that if bank accounts were to charge then the government would have to re-introduce the cash payment of state benefits or increase them to cover the bank charge.

    People like John Howard live in a different world. no doubt with his current account balance it would be preferable to have interest and pay a fee. Sadly most do not live in that world and most simply do not care if the bank is not paying their interest.

    Don’t be silly.

  29. George Williamson 21st August 2012 at 5:52 pm

    Most misselling of PPI was done when a LOAN was taken – this loan itself was prifitable, so no need missell PPI, but it was done to make more money.

    To suggest that POI misselling is linked to Free Banking is complete Bonkers – please refer yourself to your local physchiatric hospital for treatment straight away.

  30. Agree wholeheartedly with those comments that there is current no free banking. It is not as simple as taking your deposit, paying no or little interest and subsequently lending out to someone else at 8-30% interest. Deposit money is lent out several times over at these interest rates due to fractional reserve banking and so banks are able to make multiples of these interest rates. It is frightening that the leaders and regulators of this industry are telling us that they need to charge fees to be profitable. It is either a case that they simply do not understand how it works or are trying to actively fleece the consumer. I wonder which it is?

  31. @GMAC

    It’s both.

    1) They don’t understand (poor things) on the basis that those that can’t, teach.
    2) They want more dependency on the state (it’s part of the socialist ideal)

    The upshot of all this is more bureaucracy and more tax. Let us not forget that if bank accounts attract a fee that fee will attract VAT.



  32. Totally agree Larry.
    Its scary how little knowledge and business ability these people have! They’d be thrown out of the Dragons Den!

  33. Michael Wainwright 24th August 2012 at 4:11 pm

    IAN, if you can show me ANY way that I am paying for my bank accounts I will stop believing that YOU DO NOT KNOW WHAT YOU ARE TALKING ABOUT. I use no services from my bank apart from having a current account. I pay no fee of any description for that account. That makes it FREE. If you and others convince the banks to start charging ordinary people like me,who administer their accounts correctly, I hope you too suffer financially. John Howard must of course have a twisted sense of humour.

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