FSA: Free banking is 'bad for customers'

By DAN HYDE
Updated: 19:01 EST, 29 November 2010

It seems like bizarre logic, but free current accounts are actually bad for customers, the head of the City watchdog has warned.

Free is bad: Lord Turner has cast doubt on the merits of free banking

With Britain's banks deluged by 7,000 complaints a day, Lord Turner, the chairman of the Financial Services Authority, hinted that the 25-year-old practice of free banking is partly to blame.

Banks use the classic 'loss-leader' tactics perfected by supermarkets by leaving almost all of the 54m current accounts in the UK free to use when in credit.

Once ensnared, those customers are then cross-sold other products like loans, cards, mortgages, insurance and pensions.

In a supermarket you might see a razor handle sold dirt cheap on the proviso that customers will need to keep buying hugely marked-up blades afterwards.

But loss-leading current accounts just pile the pressure on bank staff to meet stringent sales targets, Lord Turner has warned.

It means everything from credit cards to pensions are peddled to unassuming Britons who often do not need or want them.

The FSA estimates that this mis-selling costs customers £500m a year when commission and fees are taken into account.

'The current account ... is essentially a loss-leader ... which banks provide in order to get hold of a relationship on which to sell other products,' Lord Turner said.

'Because of that, there is a desire for them to sell products that are not appropriate. It is also the case [that] a loss-leader makes it more difficult for new entrants because they can't make a profit just out of the core product ' they have to immediately be able to cross-sell as well.'

Metro Bank chairman Anthony Thomson says a dangerous sales target culture has relegated customer service to the backroom at the big banks.

He said: 'The big banks are only interesting in selling, not customer service. I don't think you can change the culture of a big organisation.'

He added banks' fetishism with cutting costs is also to blame for the lack of decent service on the High Street - something he hopes Metro can change.

'It's not that the big banks can't give good service it's that the only way they believe they can improve their profitability to cut costs. And of course the major costs in a bank are its people ' or rather the cost that is easiest to take up and down.

'Cutting half an hour off opening times can save a major bank from paying 2,000 staff across the country.'

Collectively, Britain's banks receive around 7,000 complaints a day. Many of these are concerned with products that have been mis-sold to customers who didn't need them.

An example that's hit the headlines in recent years has been payment protection insurance (PPI). PPI was often sold alongside credit cards as insurance for when a customer cannot meet his or her repayments, such as during periods of unemployment.

But many customers were pushed into taking PPI cover at point-of-sale despite it being inappropriate for them.