Free banking is a 'dangerous myth'
The idea that banking is free is a "dangerous myth," according to Andrew Bailey, who is set to become the chief regulator of the financial services industry.
"It is a myth because nothing in life is free," says Bailey in a statement. Customers may think their bank account is free, but in actual fact they are paying through hidden costs such as the extremely low interest rate many banks offer on their current accounts.
Bailey is currently an executive director at the Bank of England but in July he will take up the position of chief regulator of the Bank's new Prudential Regulation Authority. Some experts believe his attack on free banking is a sign that, once he's started his new role, Bailey will launch a full investigation.
This disconnect between the products banking customers have and the costs associated with them caused by a belief in free banking is causing too much confusion for both customers and the banks themselves, says Bailey.
"I 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," he adds.
"In short, I think that the reform of retail banking in this country cannot move ahead unless we tackle the issue of free in-credit banking, and have a much better sense of what we are paying for and how we are paying."
The practice of a dishonest salesperson misrepresenting or misleading an investor about the characteristics of a product or service. For example, selling a person with no dependants a whole-of-life policy. There have been notable mis-selling scandals in the past, including endowment policies tied to mortgages, employees persuaded to leave final salary pensions in favour of money purchase pensions (which paid large commissions to salespeople) and payment protection insurance. There is no legal definition of mis-selling; rather the Financial Services Authority (FSA) issues clarifying guidelines and hopes companies comply with them.