The proposal to enable banks to charge fees for accounts in credit in order to stop mis-selling could see consumers end up with the worst of both worlds
Sharks are lean, mean hunting machines with one aim in life – to ensure the survival of the species. Banks have proved slightly less efficient at ensuring their own survival, but they do seem to hunt customers with one fervourous aim: to maximise profits for shareholders.
So I am somewhat surprised by the idea that if banks start charging for current accounts they will stop mis-selling other products.
Andrew Bailey, the Bank of England’s executive director and acting head of the body that will become the Prudential Regulation Authority, the banks’ future regulator, has previously suggested free banking for customers in credit is a myth.
I agree: “free banking” is and always has been subsidised by current account holders who pay extortionate amounts for overdrafts, and by the banks paying paltry or no interest to those who keep their accounts in credit. In fact Which? estimates consumers pay more than £9bn a year in fees and lost interest on their current accounts.
There must be more transparency on what banks charge and how much our current accounts cost. Annual percentage rates and equivalent annual rates are incomprehensible to mere mortals outside the banking industry, and some types of credit, such as overdrafts, don’t even have to display them.
Errol Damelin, co-founder of Wonga (yes I know we have spent a lot of time criticising his company, but on this subject he makes sense), has long called for an equal playing field in the way credit costs are shown. He suggests a figure which shows the pound cost per hundred borrowed per day for all forms of credit.
This would undoubtedly make the charges on his own loans (4,214% APR) look more reasonable, but it would also set in context unauthorised overdraft costs. The Consumer Finance Association has calculated that the APR for an unauthorised overdraft of £200 from the Halifax, which incurs a daily fee of £5, is a staggering 90,888.9%.
But now Bailey has gone a step further, saying “official intervention” is needed to allow banks to start charging for current accounts, thereby clarifying the price of banking. He argues that free banking might be encouraging mis-selling of financial products because of the “unclear picture” of the price of banking. He suggests reform of the banking industry could not take place until “we have a much better sense of what we are paying for and how we are paying”.
That is where we disagree. How is that supposed to stop banks mis-selling?
On countless occasions over the past few decades banks have flogged unsuitable products to trusting customers who believe their banks have their best interests at heart. There’s the structured investment products that collapsed; home income plans that resulted in homeowners losing their homes; pension transfers from generous and subsidised final-salary schemes into high cost personal pension plans; low cost endowments that failed to produce enough cash to pay off the mortgages they backed; and shared appreciation mortgages that have seen homeowners locked into properties they have long since outgrown. And most recently there is payment protection insurance, a policy that in many cases is completely useless and for which banks are having to refund billions of pounds in premiums.
The reason banks sold these expensive and often dangerous products is that they generated large profits. Won’t the banks continue to look for high revenue products, which by the very fact of their cost represent a poor purchase for the vast majority of customers, regardless of whether they can charge fees on current accounts in credit or not? It’s in their nature.
Mike O’Connor, chief executive of Consumer Focus, says there would be “real value” in establishing a more open and honest relationship between banks and their customers on what they get, how much it costs and whether others are offering better value for money.
But he warns: “What must not happen is that consumers end up with the worst of both worlds: paying for accounts but still enduring unfair charges, opaque and complex products, mis-selling and poor customer service.”
Or do you suspect, like me, that Bailey’s recommendation – made with the best of intentions – could end up with customers losing out on both counts?