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Top regulator says ‘dangerous myth’ of free banking must end

Bank of England executive director Andrew Bailey will today warn free banking is a “dangerous myth” and reform of the retail banking industry cannot go ahead unless the issue is tackled.

In a speech being given today at the Westminster Business Forum in London, Bailey will say the free banking customers believe they are receiving does not exist as they are actually paying for banking services “in ways that are hard to link to the costs of the products we receive”. He will warn this can distort the supply of banking services.

He will say: “The dangers include that the pricing of banking to consumers varies too much depending on the services they use. I also worry that the banks may not properly understand the costs of products and services they supply. And I worry also that this unclear picture may have encouraged the misselling of products that is now causing so much trouble.

Barclays, Lloyds, Royal Bank of Scotland and HSBC are currently paying around £9bn in compensation for misselling payment protection insurance.

Bailey will add: “In short, I think that the reform of retail banking in this country cannot move ahead unless we tackle the issue of free in-credit banking, and have a much better sense of what we are paying for and how we are paying.”

“I don’t think we will have a retail banking industry that is properly serving the interests of the public until we tackle the dangerous myth of free in-credit banking.”

Bailey believes attempts to tackle the issue of free banking may require “intervention in the public interest”.

Bailey is to become head of the Prudential Business Unit, the part of the FSA now mirroring the future PRA once Hector Sants leave his position as chief executive of the regulator next month.



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There are 9 comments at the moment, we would love to hear your opinion too.

  1. Lee Whiteside 24th May 2012 at 9:03 am

    “I don’t think we will have a retail banking industry that is properly serving the interests of the public until we tackle the dangerous myth of free in-credit banking.”
    Same could be said for them offering ‘free’ financial advice and then taking 7% initial commission but telling the client there is no charge

  2. I generally agree with the comments above.

    Anything with a cost but is perceived as being ‘free’ by the end user creates issues.

    We also see the apparent pressure on banks to cross sell in order to maintain margins and I feel this is part of the same problem.

  3. I think if all banks were to pay credit interest on the balances held in current accounts there might be less resistance.
    They seem quite happy to have use of clients credit balances for “free” and are very prompt in charging for being overdrawn—it does seem that the bankers want their cake and to be able to eat it without reducing their pot

  4. Great, so now RDR is being used to justify charging hard pressed families for their banking. Wonderful result.

  5. Laurence Parsons 24th May 2012 at 9:35 am

    Is this man really being put in charge of the PRA? Almost everything he has said here is either wrong or misleading.
    “In credit banking” is being paid for – by the absence of credit interest.
    “in credit banking” is not responsible for MPPI mis-selling; greed is responsible for MPPI mis-selling.
    Consumers currently have the option to pay for their banking services if they want. They also have the option to receive free in-credit banking. This is called market choice, and is a “good thing” for the consumer, who the PRA are supposed to be protecting.
    Anyone who removes choice and then tells me that it’s “in my own interest” should be removed from his post.

    It strikes me that having been put in charge of the PRA, he’s now searching around for new legislation to impose to justify his job, whilst also keeping his old friends at the banks happy.

  6. cliff williams 24th May 2012 at 9:48 am

    Free banking led to the PPI scandal? I can’t see the connection. OK lets start charging for banking because that won’t lead to regulatory scrutiny. ‘Hello, is that the FSA, it’s the BofE here, shall we talk?’

  7. Lloyds TSB mortgage advisers are expected to cross sell to 1.30 policies per loan as a minimum.
    From that point the client pays through the nose…..or is led by the nose!
    ‘Free’ usually means ‘hard sell’.

  8. I believe what he is saying is that people are under the impression that their banking is free, but don’t realise that they are being made to pay by the banks in other ways.
    “the free banking customers believe they are receiving does not exist as they are actually paying for banking services “in ways that are hard to link to the costs of the products we receive” ”
    On this basis I would agree that the way banks charge customers for this so called free banking should be addressed. However, knowing the way they operate, the banks are likely to turn this around and use it as an excuse to start charging for all services.

  9. Personally I am encouraged by this statement. The banks have been allowed to manipulate for far to long. It is really quite amazing that they have been allowed to blatantly mislead the general public, who are let’s be honest, gullible on a good day.

    I am probably wrong, but there have been comments about the mortgage award advertising lenders like Nat west being stopped as its obviously false. RDR if applied properly in the banks will mean they will have to be upfront about being more expensive than anyone else. No more execution only mortgage business, means liability and expensive, properly trained staff will be required. The selling of gimmick accounts for a monthly fee are being investigated because they do not offer good value. Could we be moving into a tough new era that is at least set on a level playing field finally?

    I will still dream that Banks are going to be made to apply the data protection rules, stop cold calling clients based on private information and mass mailing even though the clients have opted out repeatedly.

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