Idea of free banking ‘dangerous myth’ says regulator

Andrew Bailey, executive director of the Bank of England, described free banking as a “myth” as it distorts the supply of banking services and encourages banks to push up fees elsewhere in their business.

He said regulatory intervention may be the only way to bring about change as it would be hard for a single bank to break ranks without losing business.

Millions of Britons still enjoy free banking and there is likely to be a furious reaction at any attempt to introduce fees for standard banking services, even though other European countries generally charge and it could mean lower costs for other services.

Mr Bailey said: “I don’t think we will have a retail banking industry that is properly serving the interests of the public until we tackle the dangerous myth of free in-credit banking.”

He believes the price of banking to consumers varies too much depending on the services they use.

In his speech to the Westminster Business Forum, Mr Bailey added: “I also worry that the banks may not properly understand the costs of products and services they supply.

“And I worry also that this unclear picture may have encouraged the mis-selling of products that is now causing so much trouble.”

The banking industry is currently paying out billions of pounds in compensation to customers mis-sold payment protection insurance.

Mr Bailey added: “It is hard for a single bank to break out of the existing situation without appearing to raise the price of its service to customers.

“And, it is hard for the industry as a whole to break out without appearing to collude. So, it may require intervention in the public interest, not least because it is a way to encourage greater competition.”

Mr Bailey is in line to supervise Britain’s banks as the head of the new Prudential Regulatory Authority.

The British Bankers’ Association said it planned to hold talks with Mr Bailey as part of its ongoing review of the issue.