FSA chief says free banking outmoded & doesn’t work!

14th March 2012  

The Financial Services Authority (FSA) has released a scary new report which highlights the key risks which face consumers from the financial services sector over the next 12 to 18 months. The Retail Conduct Risk Outlook is a 118 page analysis of the 15 biggest risks facing the public from their banks, credit card issuers and financial services providers.

The Managing Director of the Financial Services Authority (FSA), Martin Wheatley used the presentation of the report as an opportunity to put further pressure on the concept of free banking, saying that it’s was an ‘outmoded concept’ and ‘doesn’t really work’.

The Senior Regulator refused to be drawn on whether he was in favour of an end to free banking – stating he thought it was too emotive an issue to discuss further. Wheatley said that “the reality is that if you are providing services free it is being subsidised from somewhere else”.

Its a fact of life that the costs of opening and maintaining free current accounts is being met by profits from other areas of banking business like loans and credit cards.

Poor and vulnerable members of society are also helping to fund free banking by being more likely to be hit with account ‘out-of-order’ fees and penalties for unauthorised borrowing, which bear no relation to the actual costs banks incur for items like returned cheques or direct debits.

Wheatley, who will head up the new Financial Conduct Authority when it’s spun out of the FSA in 2013, warned that “the industry has to rebuild trust. What we keep finding is that actually the industry is selling very expensive products in a very aggressive way and that just destroys trust”.

The Government is in the process of shaking up the UK banking industry and the legislation it operates under following the 2007 banking crisis, and in the wake of 25 years of mis-selling which has recently cost the banks (many of which are now majority owned by the tax payer) £15 billion in compensation.

The most recent scandal involved the wrongful selling of Payment Protection Insurance, or PPI, to millions of borrowers who bought loans and credit cards.

Wheatley went on to say

“Consumers rely on financial firms and their products to provide them with vital services – literally the means to run their lives.

“They need to be able to trust that the products they buy work for them and that they’re getting a fair deal.”

Statistics show that the number of free bank accounts on offer has plummeted in recent years. Many banks now charge up to £25 a month for even a basic current account.

The downsides of free banking have also been highlighted by the statutory consumer champion, Consumer Focus. Michael O’Connor, Consumer Focus’s chief executive underlined the fact that the ‘perception’ of free banking also doesn’t really help the consumer because it stifles competition.

Mr O’Connor said

“It is great not to have to pay for a bank account, but is not necessarily good for the consumer in the bigger scheme of things.

“Bank accounts are paid for by people who make mistakes and go overdrawn – they are often the least well-off and the least well-informed.”

As ever, what the consumer needs is transparency. It’s very difficult to compare the true cost of switching banks, or of a particular current account if its costs are hidden in other associated products.

Although it may be billed by the bank as “free”, its’ also very difficult for the consumer to identify the potential costs they could incur running the account over, say a 2 or 3 year period, or to understand who or what is meeting the inevitable cost of running that account.

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