Free banking 'a dangerous myth' says BoE director

Executive director of the Bank of England, Andrew Bailey, says free banking encourages misselling and should be ended.

by Michael Northcott
Last Updated: 19 Aug 2013

The idea of paying a monthly fee for your current account even when you are in credit seems bizarre: we’ve had it free for so many years, though they haven’t been so lucky on the continent. But free banking in the UK could be about to come to an end, if Andrew Bailey, who is also executive-elect of the Prudential Regulatory Authority, has his way. 

He argues that the ‘free banking’ model has indirectly caused the misselling of products, such as payment protection insurance (PPI). UK banks fund their services by fining customers for late payments (for products such as PPI) or exceeding overdraft limits. In other words, banks could be encouraged to flog products that customers don’t need, in an attempt to increase their revenue from fines.

Speaking at the Westminster Business Forum yesterday, Bailey said that banking reform couldn’t make any progress in the UK unless the issue of free in-credit banking is tackled. He added that customers need ‘a much better sense of what we are paying for and how we are paying.’ Bailey is the man to listen to on this: in July he will become the chief regulator of the financial services industry. 

But there are issues with the idea. First, MT can’t imagine consumers are going to give a warm welcome to an extra cost of living: the wallet is already being squeezed enough. Second, as Bailey himself pointed out, no bank will be willing to start charging when its competitors are still free, as the loss of market share would be instantaneous. For banks to collectively implement a new charging model would require some level of ‘collusion’, which is illegal under competition law. The only answer, then, is regulation, and that’s not the word of the day in the Cameron clan…

The buzz in political debate has long focused on ways of reforming the banking sector, and Bailey believes that free banking means the customer and the bank lose sight of the value of services. Currently, only the UK, India and Australia have free banking: every other country in the world charges for services such as online banking, cash machines, and high street branches. 

But if new monthly tariffs are introduced in the UK, we can’t help thinking that customers will only be irked by having to pay for their banking. Will it make them ‘appreciate the value of the services and bankers’? You must be bonkers…

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