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Free banking “central problem” says FSA chair

Lord Adair Turner, the chair of the Financial Services Authority, has criticised free banking, saying it reduces competition and encourages mis-selling.

Speaking today in London, Lord Turner said that free banking for those in credit, which was first introduced in 1985, acted as a barrier to new entrants into the market, because they might not be able to make a business model “stack up.”

In a frank analysis, he described “free-if-in-credit banking” as “a central problem in UK retail banking.”

“One reason many people don’t like banks is that in the short term customers are locked in, and in the medium term competitive choice appears muted. So we need to facilitate new market entry into retail banking,” he said.

“Many who stay in credit get a good deal, subsidised by others who pay through, for instance, unauthorised overdraft charges and PPI insurance premiums.”

“It is not a sound basis for a long-term trust-based relationship between a competitive banking system and its customers.”

Comparing banking with other sectors of the economy, Lord Turner said: “The car buyer is well-equipped to test drive different cars and select the one he or she prefers; the unsatisfied supermarket customer can take his or her business elsewhere.

“But individuals cannot test drive complex investment and insurance products: they rely on trusted providers to give explicit or implicit advice. And many purchases are too infrequent and too large to make switching provider an effective market discipline.”

Lord Turner has expressed similar views in the past. Giving evidence to the Treasury Select Committee in 2010, he argued that banks charging for current accounts could make the system more transparent for customers and encourage competition.

This was posted in Bdaily's Members' News section by Robert Cooper .