Andrew Bailey the executive director of the Bank of England today described free banking as a “dangerous myth” that may be fuelling the mis-selling of financial products.
Though customers may view their current account as a free service there may be a number of hidden costs involved, including overdraft fees and low interest rate levels offered on many current accounts.
In a speech given at the Westminster Business Forum, Bailey said:
“Nothing in life is free; rather, it means that we pay for our banking services in ways that are hard to link to the costs of the products we receive. This can distort the supply of banking services. 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.
“This unclear picture may have encouraged the mis-selling of products that is now causing so much trouble.”
The interest rate offered on current accounts is often far lower than that offered on many savings accounts which could potentially result in customers losing out in real terms.
In response to Bailey's speech Which? Executive Director, Richard Lloyd :
"It's a complete myth that banking is free now - consumers pay over £9 billion a year in fees and lost interest on their current accounts. The idea that if banks charged more, they would stop trying to mis-sell other financial products is completely unfounded.
"We need to see greater transparency about the true cost of banking. All banks should be required to provide downloadable electronic information so that people can clearly see how much they currently pay for their accounts and make ‘one-click' comparisons between accounts.
"With comments like those made today, it's even more important that the new regulator, the Financial Conduct Authority, is a watchdog that stands up for consumers and stands up to the banks."
Michael Ossei, personal finance expert at uSwitch said:
"The real crux of the issue is transparency. Often customers don't even know what services they are paying for and how much they are paying. This makes it almost impossible to compare deals and work out which accounts offer the best value. At the moment customers are spending millions in fees and charges which could be easily avoided if they were provided with the right information. The system can be and must be clearer."
Andrew Bailey is currently a front-runner for the position of head of the Prudential Regulation Authority (PRA). While the planned Financial Conduct Authority will be responsible for the regulation of products, the PRA will be responsible for supervising safety and soundness of lenders.
Bailey said in his speech:
"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."