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25th May 2012

New UK regulator suggests ending 'free' banking
Opinion

Andrew Bailey, the chosen head of the new UK banking regulator, the Prudential Regulation Authority has started a major controversy. He launched an attack on 'free' current (Check) accounts arguing that the need for banks to make up for the cost of running these accounts creates instability and potentially risk taking. He made reference to the Payment Protection Insurance mis-selling as an example. Bailey believes'free banking' leads to lack of clarity on cost amongst consumers also. A third argument is that the cost may fall unfairly on certain groups, such as for unauthorised overdrafts. Accepting that one bank could not start charging in isolation he suggested that perhaps the move to charging for the account should be forced by government.


The first problem with this viewpoint many have pointed out is that current accounts are not free, the bank gains interest income from the account balances and through charge for overdrafts, foreign transactions etc.


It is curious that Bailey should think that tariff's involving interest payment and a range of charges for different payment and credit types should add to clarity, and somehow be comparable between banks. It would in fact be likely that banks would deliberately seek to make the tariffs difficult to compare in the way telecom companies do. He also does not appear to take into account the cost to the banks in applying such charges. This cost does not arise from the calculation of the bills, which is done by computer and would just mean longer and more complicated statements. It would arise instead from the massive increase in customer service personnel needed to handle the questions and disputes. Another criticism was why Bailey should think that gaining more income from current accounts would lead to banks charging less on other products or selling them less hard.


An interesting exercise would be to determine how many of those bank accounts which have been charged for unauthorised overdrafts have the characteristics of relatively high transaction volumes and a low average balance throughout the month. If there was such a correlation then this group would be no better of under Bailey's charging scheme.


Bailey admits to obsessing on the subject, saying on a radio program that he was "like a dog with a bone". His suggestion of forcibly ending free banking because of this obsession seems totally inappropriate and must raises concerns as to how he will lead the new regulatory body. Hopefully the politicians, who should set policy not the regulator, will see that forcing such a change on an unwilling banking customers would not be a vote-winning idea.