Banking reforms could see ‘end of free personal bank accounts’
Rules designed to protect bank customers’ money and make it easier to switch accounts could lead to the cost of running a current account rising and “the end of free banking as we know it”, according to industry experts.
The recommendations, published in the Independent Commission on Banking (ICB) report, and to be introduced by 2019, will ensure accounts are transferred within seven working days and regular payments automatically redirected to customers’ new accounts via a redirection service that will remain in place for a year.
The ICB said banks should also publish annual statements showing the amount of interest customers are missing out on by having a current account – known as interest foregone. This would allow consumers to compare the cost of so-called “free-if-in-credit” bank accounts that might pay low rates of interest with paid-for services that could pay higher rates of interest.
The ICB claimed the rules would boost confidence in the ease of switching and enhance the competitive pressure exerted on banks through customer choice – the report had found that consumers perceive switching to be difficult and risky because they cannot trust the switch will proceed on time and bills might go unpaid as a result.
The report ruled out number portability, which could have seen customers take bank account numbers with them when they switch banks in the same way they can take mobile phone numbers to new providers.
But Kevin Mountford, head of banking at Moneysupermarket.com, said the changes, including the main reform of ringfencing, could come at a price.
Some bankers are also warning that ringfencing, the separation of a bank’s investment acitivities from its retail banking operation, could have a negative effect on its credit ratings, making it more expensive for the bank to borrow. Others say that imposing higher capital requirements will reduce bank returns and their ability to lend.
“The main concern of these recommendations is the additional costs on the banking sector, which could be passed on to customers in some shape or form,” said Mountford. “Ringfencing could create an uneven playing field, because all the profits and risk generally come from the investment side, and some banks are better at it than others. Anything can happen between now and the proposals being implemented: who knows what will happen to the credit ratings of those who do not perform well.
“Banks are businesses with shareholders, and they need to make a profit. They are facing pressure from all angles – with falling credit ratings making it more difficult to borrow, they have to pay more to attract custom; they need to hold more funds to satisfy a tighter regulatory framework; then there’s the cost of PPI too. The one way they can make money back is through charging for personal and small business customers. It could mean the end of free banking as we know it.”
He added: “We will see more banks offering premium, free services to certain customers, such as Lloyds Banking Group and HSBC have introduced recently, but if you don’t fit that profile you will pay. If you don’t use certain products in the way they are designed for that account, you will pay or be shown the door.”
Peter Vicary-Smith, chief executive of consumer rights group Which?, said any additionals costs should not be passed on to customers. “More banks competing for market share is the best way to make banks work harder for their customers and prevent them from simply passing on the cost of cleaning up their act to hard-pressed people and small businesses,” he said.
“Consumers are thoroughly sick of being asked to foot the bill for banking reform – it is the investment banks that have caused the crisis who should pay to put things right.”
Stefan Maryniak, personal finance expert at uSwitch.com, added: “If the retail arms stop making money, banks could start implementing more fees in order to save them. We could also see banks trying to attract a certain calibre of customer. This is great for these people, who could see increased competition for their business, but those less attractive to the banks could be left on the shelf.”
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