Love of free banking does not excuse the scandals
AS THE fifth anniversary of the credit crunch approaches on August 9th – famously dubbed “the day the world changed” by disgraced former Northern Rock boss Adam Applegarth – few disagree that banks were the worst culprits of the crisis. The subsequent shocking behaviour of the sector, from mis-selling and tax avoidance to interest rate-rigging and money laundering, has only served to underline the depths to which a once solid and respected industry has plumbed.
But here’s a startling new take on who’s really behind some of the banking industry’s worst scandals – it’s the customers, of course. Not that Lord Adair Turner, the man who would be governor of the Bank of England, put it quite like that yesterday in a speech on the future of banking. But Lord Turner, who is chairman of the UK’s Financial Services Authority, suggested the British customers’ preference for “free” current accounts may have contributed to the mis-selling of payment protection insurance (PPI) that has so far cost the industry almost £7 billion (€9 billion) in compensation. The British banking industry is one of the few in the world to offer free current accounts, and has done so for almost three decades now, ever since the Midland (now part of HSBC) decided in 1984 to steal a march on rivals by introducing free banking for those in credit. Customers flocked to open accounts and Midland’s high street rivals were soon forced to follow suit. The money is often clawed back in other ways, such as hefty overdraft charges, and consumer groups say free banking in Britain is little more than a myth. They would prefer more transparency and fairness across the industry generally but, despite that, customers have proved deeply resistant to any moves to levy current account charges as a matter of course.
Lord Turner’s view is that the cost of free banking is a barrier to new entrants into the market, and encourages banks to claw back the cost by pushing other products. PPI is a case in point – it was mis-sold to millions and the banks are now paying the price. The FSA chief is not alone is his view – just a couple of months ago the Bank of England’s Andrew Bailey raised the prospect of official intervention against free banking in an effort to promote competition.
There’s no doubt the banking industry is badly in need of more competition but it is laughable to suggest Britain’s love affair with free banking is behind the banks’ bad behaviour. They all mis-sold PPI and we know Barclays had a good deal of company in its Libor-rigging antics. Other companies do not routinely fleece customers to make up profit if they are losing cash in one part of their business, nor would we expect the authorities to show any sympathy if such behaviour was uncovered.
Banks remain highly profitable – as the banking reporting season, which kicks off tomorrow with results from Lloyds Banking Group followed by Barclays on Friday, will show. It was greed and a debased culture that led them to behave as they did, not free accounts for customers.
Lord Turner has made little secret of his ambition to move from Canary Wharf to Threadneedle Street when Sir Mervyn King steps down as governor of the Bank of England next year. In an interview with Bloomberg yesterday, the FSA boss admitted as much – when asked about the job, Lord Turner replied: “I would not rule myself out,” although he added that he’d have to think about it “when the time comes”.
He effectively declared his candidacy last week, in a speech in Manchester, when he criticised the bank’s performance during the financial crisis and raised the prospect of radical and “creative” action to boost economic growth and stave off deflation.
He said yesterday the British central bank should not rely on a “God-like figure” at the top but should instead see the key decisions taken by its monetary and financial policy committees, where they would be subject to discussion and challenges.
The “God-like” reference may well refer to the current incumbent’s reputation as an aloof and autocratic figure, but mischief-makers in the city were last night wondering whether it was also a warning shot across the bows of one of Lord Turner’s main rivals for the governorship – Gus (now Lord) O’Donnell. When he was cabinet secretary, the ex-British treasury economist, was known by his initials: GOD.
Fiona Walsh writes for the Guardian newspaper in London