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