Question: what is the most effective way to ensure misselling of a financial product will take place? Answer: by creating an environment where you need to cross-subsidise certain groups within your customer base at the expense of the rest.
For those of you who might imagine I’m talking about IFAs and life and pensions providers, rest easy. This week I want to talk about banks. Specifically, I want to talk about banks in the context of “free banking”, that great illusion we all talk about but so few of us actually enjoy.
In the past week or two there has been a lot of discussion as to whether free banking (I’ve removed the quotation marks) actually works. As former FSA consumer panel chairman John Howard reminded us recently, a range of senior City figures, including Barclays chairman Sir David Walker, FSA chairman Lord Turner and chief executive designate of the Financial Conduct Authority Martin Wheatley, have all come out against the idea.
John Howard accepted that getting rid of free banking would be incredibly unpopular and could have adverse political consequences in the current climate. He wondered whether, in a dying gesture designed to leave the new regulatory bodies with a clean slate, the FSA might introduce rules in the coming months to “force” banks to introduce charges for current account customers.
This would presumably involve requiring them to apply appropriate charges to each individual aspect of their banking operations, including current accounts.
Yet no sooner had Howard’s comments appeared in Money Marketing, than Which? chief executive Peter Vicary-Smith weighed in with his own counter-blast. In Vicary-Smith’s case, he took aim at those who suggested “that if the banks charge a monthly fee for current accounts this will prevent the misselling scandals of the past.”
Which? has recently carried out research which “proves” that free banking is a myth – a conclusion most of us who have worked in financial services journalism, or the wider industry for more than 30 minutes could have told our pals in Marylebone Road.
The way banks make their money, according to Vicary-Smith, is by “paying hefty fees for such basic services as withdrawing and spending cash abroad”, as well as excessive charges on their overdrafts and “lost interest” on their savings.
He therefore dismisses any suggestion that banks should charge for operating a current account: “This suggestion is completely ridiculous and a damning indictment of the current culture of the banking industry. Consumers should not be forced to pay even more when the banks have let us down so badly.”
The Which? position is that banks are making healthy profits, so why add to them by collectively free banking, whether at the request a regulator or otherwise?
Like many Which? arguments, this one has the strong whiff of populism about it. How could it not? Throw in a mention of PPI misselling and the Libor fixing scandal, add a reference to the banking crisis and you can just see how the debate is going to play out.
Yet what is interesting about Vicary-Smith’s comments, also in Money Marketing, is that they don’t engage at all with a central aspect of John Howard’s own case – namely that the cross-subsidy that allows banks to offer so-called free banking to some of their customers comes disproportionately from the less-well off.
In other words, millions of students, of low earners, those in severe financial difficulties and the less financially astute are contributing towards the billions of pounds needed to ensure that the rest of us, who get bank statements every months, access to web accounts and telephone banking, access to thousands of bank branches and all the processing involved in running our accounts, pay nothing whatsoever for these services.
I can see how such a state of affairs can be highly attractive to the average Which? magazine subscriber. Generally more affluent and financially aware than the average consumer by definition, they are the ones least likely to run up overdrafts every month, for which they will be forced to pay through the nose.
When they go abroad or their nice summer break in the Dordogne or the Italian Lakes, they are most likely to take Which?’s advice and go armed with a card that doesn’t charge for overseas purchases – did anyone mention Saga? The chances are they will probably even know about dynamic currency conversion, bless them.
But for the vast majority of the population who haven’t quite got round to subscribing to Which?, maybe because they can’t afford it, the idea that they should be paying for Vicary-Smith’s members to enjoy their freebies is not quite as attractive.
Where Which? is entirely correct is in its argument that ending supposedly free banking won’t end misselling. For that, we need much tighter regulation of the banks – with heavy penalties personally levied on individual directors who failed to ask the right questions about the way their operations are run.
Yes we also want full charges disclosure from banks, I’m with Which? on that. But once we have it, we need to face up to some unpalatable facts. And one of them is that to maintain the current system, where the poor subsidise the better-off, allowing banks to hide the true cost of operating a current account, is not tenable either.
Nic Cicutti can be contacted at: firstname.lastname@example.org