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Ending free banking won't stop the mis-selling

Banks claim that charging customers for current accounts will help avoid future mis-selling scandals. Really?


by Victoria Bischoff on Aug 21, 2012 at 12:45

Ending free banking won't stop the mis-selling

The way to avoid future banking scandals is to charge customers for current accounts, say the banks.

Yep, according to our high-street lenders, the only way they’ll be able to restrain themselves from mis-selling financial products like the now infamous PPI policies is by disposing of the free banking model and introducing a monthly fee for current accounts.

Audacious as this argument is, the banks aren’t the first to suggest the ‘free banking’ model is flawed.

Is 'free banking' a myth?

Consumer groups have long argued that free banking is a myth, as banks simply offset the cost of providing free current accounts with other areas of banking. As a result we end up paying regardless, be it through extortionate overdraft charges, poor mortgage deals or paltry savings rates.

Just today Which? claimed that some customers are paying up to £900 a year in bank charges, while others suffer through lost interest and hefty fees for withdrawing cash abroad.

Earlier this year, meanwhile, Andrew Bailey of the Bank of England warned that free banking is not only a myth but ‘a dangerous myth’, as by not charging for their core service banks are under increased pressure to cross-sell products where the margins are high and, unfortunately, the customer often gets a poor deal.

What's more, according to FSA chairman Adair Turner, the practice of offering free accounts is also acting as a serious barrier to new entrants in the personal banking sector and, as a result, damaging competition.

Fees: a slap in the public's face?

Although Which? is calling for greater transparency about the true cost of banking, it added that charging for the most basic accounts while the industry continues to be rocked by scandals such as PPI mis-selling, Libor-rate rigging and IT failures would be a slap in the face for people who bailed out the banks. 

Furthermore, even if the banks do introduce a fee for banking, this doesn’t necessarily mean they will reduce their overdraft charges or suddenly start offering us a better deal on our savings.

In fact, one person in five already pays a monthly fee for their bank account. These customers have what's known as a packaged current account – an account that charges a monthly fee of anything between £6.50 and £40 for added extras such as travel insurance and breakdown cover.

Although, it doesn't bode well that the regulator has been forced to crack down on this market after it emerged many people are being sold expensive current accounts they don't need.

Our banks are greedy. We saw it before the credit crunch and we’ve seen it time and time again since.

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25 comments so far. Why not have your say?

White Stick follower

Aug 21, 2012 at 13:07

So, to stop bankers from being dishonest, or, at least being involved in sharp practices we have to pay them- pay them even more than we pay already, on top of the vast amounts they pay themselves of course. As for the bail out funds, I confess I may not have noticed, but how much interest does H.M. Treasury charge bailed out banks for the use of OUR money, which keeps them in the style to which they have become accustomed?

I haven't seen many real interest free loans being offered by banks to customers;- has anyone? And how much of the 24-hour overnight interest earned by banks using OUR money gets returned to the bank's clients, not a lot I suspect. Now doubt someone better informed than I can answer these questions.

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Aug 21, 2012 at 13:19

This is the biggest con ever by the banks. Something tells me if the banks start charging for accounts, they will not adjust their fees in other areas....

So you still pay the same as now, plus whatever they decide to charge.

It beggers belief, to suggest that just by squeezing more money out of our pockets will sort the banking sector out!

The current accounts that have services can be good value for money if you chose correctly. RAC full break down cover alone with my bank, saves me £50 a year alone, then throw in travel and mobile insurance. However I have heard of some people having similar accounts to mine and they dont have a car or travel, so its a total waste.

This is the perfect time for a bank to change tact, and seperate themselves from the rest and steal customers. By offering a truely great banking experience, which would not be hard to do!! But until that day comes we are all stuck between a rock and a hard place....

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Chris Clark

Aug 21, 2012 at 13:36

One should abandon the big banks (I have, except for being stuck with Natwest for business), explore Virgin Money, Aldermore, Metro M& S, Co-op, and any one of the about 600 Credit Unions for banking services.

Market share movement suggests this is happening strongly now, and will be a repeat of the Icelandic bank pattern, where believe it or not, Icelanders actually like their new banks.

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In the Dark

Aug 21, 2012 at 13:53

The free banking as always been a myth. This has always been the position since it was introduced some 30 or more years ago. But if you must regurgitate old information, then please start to educate your readers with the trade off's that need to be actively managed by customers.

As a side issue, people I know are well informed and have deep knowledge with regards to Horse racing, Premiership football and other general topics. However, when it comes to money and financial instruments they just glaze over, for heavens sake why?

Institutions such as Banks and the Government will take the breath off your tongue and that is what they are achieving quite nicely thank you. So we cannot look to these institutions for guidance/education it is just not going to happen and my experience of over 30 years say's as much.

Financial education will no doubt be self taught by those who are interested enough, like previously mentioned sport aficionado's and their chosen subject. Taking care of the pennies will help save our pounds but we need to spot the leaks in our finances so that the breaches can be closed. This again needs education and an eye for detail, so without lecturing too much I will re-emphasise the importance of money to my sons (daughters) and if you do the same we may yet beat these ?? at their own game, perhaps!

Oh! just a though, since the introduction of 'Free Banking' our pay packets gradually migrated to monthly bank payments (I believe this was part of of the trade off at the time). How ironic then if we revert back to weekly collections at the pay office, just to avoid bank charges.

Pennies make pounds!!

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William Phillips

Aug 21, 2012 at 13:57

Banksters are only copying the politicians. When caught trading favours with rich donors to their parties, the pols say "Well, if our activities were financed by your taxes, we wouldn't have to go cap in hand to dodgy foreign millionaires, so we will make you cough up to keep us going whether you agree with our policies or not."

The alternative to succumbing to this blackmail is to accept that party politics is a dead duck, stop treating parties like British Leyland in the 1970s and let them go bust if they can only get 1% of the voters to join them.

Banksters are like burglars who offer to leave your gaff off their nocturnal knock-off list if you bung them twenty quid a week. They deserve the same retort as the grafting MPs who are supposed to legislate for our protection, but who depend on 'the strength of our great financial services industries' for handouts.

If you propose to charge me any sort of fee for the simple, ever-cheaper business of computerised money transmission, which is all I need you for, then you will also pay me a competitive rate of interest for the balance I leave in your care. And if you cannot afford that, you are not too big to fail, sunshine.

Like the Conservative Party.

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Rose G

Aug 21, 2012 at 15:06

Dick Turpin was a lot more honest than bankers who seem to believe, like their politician buddies, that they are so precious, that governments will bail them out.

The banks have been bailed out, much against my wishes, but they do not count.

Unfortunately, it leaves me to conclude that these monsters are getting a very big appetite, never mind the that they require surgery from time to time to reduce their obesity.

Governments should not be bailing out banks, especially when we have genuinely good industries who are going under because the banks will no longer lend to them, and our governments will not lend a helping hand - their should be a law against governments using taxpayers money to bail out their useless buddies in the banking industry.

I understand why they need to charge us for banking, after all, that yacht, or bonus does not come cheap!

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Jeremy Bosk

Aug 21, 2012 at 15:42

In the Northcott Trevelyan reforms in the 1850s, Civil Service pay was raised to make the taking of bribes to live unnecessary. Similarly with judges who are relatively well paid and are provided with good quality private accommodation while on circuit to leave no need for them to accept favours. Before this time, the UK was run like a modern developing country. You always gave a present to an official to expedite matters. The concomitant is that public servants do not undertake work in the private sector which might be a conflict of interest.

I like the present banking system because I just do not buy any of the rip-off financial products on offer and pay no charges. I realise that if everyone was like me free banking would soon come to an end because even the extortionate gross margin on lending that the banks enjoy is insufficient to keep them in Rolls Royce motor cars and mansions in Surrey.

But if it is decided to enforce charges for a basic current account once more there should be a separation of money transmission and custody - basic banking - from all the rip-offs. Charges should reflect actual costs - peanuts - minus the banks' profit in lending on current account balances.

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Aug 21, 2012 at 16:20

Santander offered small companies FREE Banking FOREVER, my company took it up a few years back and it has worked very well for us. They have now written to say that the free banking will now cost £7.50 a month. How can anyone trust what the banks say?

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Anthony Tinslay

Aug 21, 2012 at 16:23

In much of the excitement and extreme views mentioned above it is easy to forget one simple matter. Any individual should be responsible for his/her own actions and not just blame someone else when the individual gets it wrong or does not follow an agreement. If you write cheques without backing funds or exceed an agreed overdraft then it is your own fault and you deserve to be charged. It is simple to have FREE banking whereby in return for keeping a minimum credit balance in the current account, the bank provides cheque book, cash on demand, ATM access, Direct Debit facilities, statements and on-line banking at no extra charge. Any service beyond that attracts an agreement and a fee.

Any Bank is in business to make a profit for the shareholders and is certainly not a charity or public service as some seem to believe.When the bank gets it wrong, as with PPI, then it rightly costs the bank plenty. Packaged accounts are more becoming the norm and provided the services included are what the customer needs or uses then, for a reasonable fee, they can certainly be a good thing. However it is also the customer's fault if he/she agrees to have, and pays for, a packaged account that includes services that would never be used or needed - cannot blame the bank for that.

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Jeremy Bosk

Aug 21, 2012 at 18:11

Anthony Tinslay

People are left without funds or deep in debt through the unforeseen and unforeseeable actions of others all the time. Their incomes are lost and their capital destroyed through the actions of third parties. I mentioned being robbed by a solicitor. This man stole the sale proceeds of my house leaving me with a huge bridging loan. The stress of this led to a broken relationship and the loss of my job. Do I blame the bank for wanting its money back and coming after me for it? No. But I do blame them and the debt collectors they employed for harassing me at home and at work for years afterwards. They cost me my job and my relationship. They made me ill so that my future earnings prospects were blighted.

I quite understand that banks are not a charity. You should understand that the banks are run in an extremely anti-social manner. They prey on the weak and helpless. They lie, they cheat, they bully, they blackmail, they drive people to despair and suicide. Their business methods are not just amoral but immoral. Prostitutes, pimps and drug dealers do less harm.

If you think this kind of behaviour is just business and people get into financial trouble only through their own fault; that says a lot more about you than about the banks.

I do have extreme views on banks. I am entirely justified.

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Bryan Jefferson

Aug 21, 2012 at 18:16

Jeremy Bosk gets to the heart of the issues; Anthony Tinslay simply scratches the surface and doesn't look beyond his own well-informed dealings with banks. Not everyone who doesn't understand finance deserves to be ripped off.

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Anthony Tinslay

Aug 21, 2012 at 20:23

Jeremy - clearly I have every sympathy for your predicament but you cannot blame the Bank wanting repayment of your debt and taking whatever action it is legally entitled to do. Your problem is with the solicitor you chose and if he was a properly registered solicitor then his Association does, i believe, carry insurance, at no cost to you, to recover misconduct and theft by one of its members. That is apart from whatever conclusion is reached in a court of law. I have also, in business, come across a dishonest solicitor and when struck off the association makes good his legal liabilities caused by his misconduct.

Your last line says it all you have a biased and uncompromising opinion of banks.' rather than, in this case, the legal profession. My own experiances do indeed underline how banks can cause considerable grief and problems but usually it is a result of a combination of several factors - they are not sole villains

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Jeremy Bosk

Aug 21, 2012 at 21:37

Anthony Tinslay

The solicitor knocked me down and then the banks kicked me. Again and again and again. Your knowledge of the legal situation regarding dishonest solicitors and banks may be theoretically correct regarding today. I suspect that whatever the law, the banks will always win against the consumer because they have deeper pockets. My main problems were many years ago.

Hitler was a non-smoking vegetarian who cried for a week when his pet canary died. Nobody is all bad. But I have a very biased and uncompromising opinion of him. You will doubtless tell me that Hitler was just misunderstood.

I hope you never learn the hard way just how divorced from reality your views on the banks are.

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Cockney Dave

Aug 24, 2012 at 15:58

I am now getting p155ed off with hearing about this charging for banking. No one member of the press or financial experts have mentioned the following.

We use our debt cards to purchase goods there is a fee paid by the shop which is obviously pssed onto the customer. So we are already paying to spend our money and this is what everyone seems to fail to mention.

I for on will not be paying a single penny for ANY bank account

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Aug 24, 2012 at 16:09

@ Dave,

Good mentioned, that side completely slipped my mind!

Then through in the time to cash cheques etc.

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Anthony Tinslay

Aug 24, 2012 at 16:59

Cockney Dave- you are not quite on the mark with your analysis. If you use a Debit Card to purchase goods, there is a small cost to the shop which is absorbed into their profit margin. The cost is usually less than the charge to the shop for accepting a cheque and certainly more reliable for both you and the shop. Same applies to cash as a business depositing cash also faces a Bank charge. Thus you pay the same whatever option of three you use. The Bank prefers you to use a debit card as it is cheaper and quicker to process than either a cheque or cash. Thus the card is provided to you the personal customer FREE.

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Aug 26, 2012 at 09:33

Just a softening up exercise by the banks to boost their bonus pots. - I get notthing in interst from any of my bank accounts, yet they are earning it on my money. So now they want me to pay even more? - Must have got the idea from student tuition fees. - Once again marlity nad ethics proven to be irrelevant. The banks' moral code being," if it ain't illegal then it's OK"

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hopalong cassidy

Aug 26, 2012 at 09:39

Anthony T. Which bank do you work for?

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Aug 26, 2012 at 20:19

We all know that bank accounts are not "free" its all a question of the level of indirection in the charges and the transparency of the charges being made. Anthony T., the card is not "provided to you the personal customer FREE", we pay through the increased price the retailer charges to maintain their margin despite paying the bank to handle cash, debit or credit cards. Only infrequently do we have an explicit "handling charge" which is different for debit and credit cards (which reflects reality) and allow us to make a choice.

The point about PPI mis-selling is that people were not made aware by the bank (or the individual) the true need and costs associated with PPI. This will be repeated for other services even if banks add charges for current accounts.

50% of all current accounts are already "not free" and the real "dishonesty" about charging for current accounts is the fact that whole swathes of cash-based activities (pensions, benefits, etc.) have been moved into current accounts partially because current accounts for those people were "free" (i.e. paid for by everybody). If banks add explicit charges to individuals for basic current accounts, it will only hit those who can't afford it.

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Jeremy Bosk

Aug 26, 2012 at 20:36

In the early days of PPI it was sometimes explicitly stated that if the customer did not take out PPI, they would get no loan. This was done even to customers with large incomes and assets for whom PPI served no purpose. It should have been included in the calculation of APR under the heading of rip off.

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Anthony Tinslay

Aug 26, 2012 at 21:21

ClothKap2 - With BOE base rate at a mere ½% you cannot expect much by way of interest. However you only need to keep a nominal amount in a bank account - just to maintain a credit balance. You could also shop around as there are 'current' accounts' that pay interest although other strings are attached.

Hopalong Cassidy - Easy, NONE. Pensioner for quite a few years but I do maintain a close interest in the financial world which I find fascinating and am constantly amused at the odd things people say about that world. As with everything, one should try to understand all sides rather than blurt out rather silly and unfounded comments as some other contributors do.

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Jeremy Bosk

Aug 26, 2012 at 22:49

The base rate is the rate at which the Bank of England lends to other financial institutions and is set by the Monetary Policy Committee in response to economic conditions. The retail banks usually follow this lead, although they have the freedom not to.

The commercial banks are free to set commercial interest rates at any level they choose. The restraints are that they have to maintain a certain level of liquidity in either deposits with the Bank of England or so called risk free assets such as Gilts and competition from rival banks. Under fractional reserve banking, they lend out multiples of their unencumbered cash ie that not required to be kept for liquidity. Increasing liquidity requirements as has recently been done limits lending more than the interest level offered by the BoE. That is more of a guide to what happens to overnight deposits. Overnight deposits being cash left over after clearing between banks.

If the Boe base rate affected general interest rates significantly, loan rates for consumers would have fallen much lower and be more uniform for the same personal circumstances. I just did an online loan application for £7,500 over five years for a homeowner and was quoted APRs rates from 5.8 per cent to 62.5 per cent.

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Jeremy Bosk

Aug 26, 2012 at 23:08

Just seen this in an Investors Chronicle email:

"Whether it's for reckless lending, a failure to lend, mis-selling or unfair charges, it's easy to shower criticisms on the banks. But if you think their charges are bad, how would you feel about a fund charging a yearly fee of 2.39 per cent - and that's for a performance that has turned a £10,000 investment into £3,800 after five years? Leonora Walters names the culprit".

I don't know if you can access this free so I will tell you the answer, Manek Growth Fund. This was founded after the eponymous Manek, a pharmacist by profession, won a stock market investment competition. He was replaced as a fund manager when things began to go seriously wrong. But performance is still appalling.

So let us celebrate being well paid for greed and incompetence in all sectors of the financial services industry. UCITS, formerly know as unit trusts, have been a rip off since at least the 1960s which as far back as I remember reading criticism of their charges.

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Aug 27, 2012 at 23:45

Well said Anthony Tinslay - totally agree with your comments.

For my part I actually I think the retail banks perform a good service at a good price for anyone with a little bit of financial nous.

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Anthony Tinslay

Aug 28, 2012 at 17:12

john r - Thank you for your comments - others clearly do not always agree.

In the fascinating and complex financial world and the relationship customer/bank I find many of the comments made very strange and sometimes quite silly. I work on two basic presumptions.

First - any individual should be responsible for his/her own actions. Free independent advice is usually available somewhere even if from just a respected friend. Far too often naivety, coupled with basic inattention to detail and sometimes simple greed are to blame when things go wrong.

Second - A bank is just a commercial organisation seeking to make a profit for the shareholders as well as comfort and reward for the employees and all that implies customer care. A bank is not a charity or public service as some would imply and when things go wrong, as indeed they do, then the bank must act in the best interests of all concerned

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