A leading financial regulator has blamed the ‘illusion’ of free banking for leading to some products being mis-sold.
Andrew Bailey, director of banking services at the Financial Services Authority, said that “free-if-in-credit” current accounts have distorted the market.
He said that ‘free banking’ means that “charges are levied inconsistently across products supplied by banks, with the consequence that some appear to be free.”
Speaking at a conference on the future of retail banking, Mr Bailey said that free services had led to the mis-selling of other products and the subsequent erosion of the public’s trust in banking services.
Banks have been involved in a number of mis-selling scandals, including Payment Protection Insurance policies which are designed to repay people’s borrowings if their income fell unexpectedly.
The highly profitable policies were sold for year before the FSA began imposing fines for PPI mis-selling in 2006.
Up to 6.4 million people are believed to have been mis-sold the policies, with some customers being misled that PPI was a condition of the loan agreement they were taking out, while others were sold policies that did not meet their needs.
Mr Bailey told the conference that prior to the credit crunch, the profits on PPI sales were used to subsidise loss-leading mortgages at a time when the property market was booming.
He said: ‘In certain activities there was arguably suicidal competition in the run-up to the crisis, of a sort that we do not want to see repeated.
‘The most obvious case of this was mortgages, where margins on lending were squeezed heavily in the decade running up to the crisis, and we also saw another, I would say undesirable, development of the retail banking scene, namely the recourse to earning returns from opaque fees.”
Earlier this week the Department for Business, Innovation and Skills announced a voluntary agreement for banks to make overdraft chargers fairer.
From March, customers will be alerted by text message or email when they are close to incurring overdraft charges.
There will also be a buffer zone to protect customers who go overdrawn by a small amount from being charged.