The chairman of the Financial Services Authority (FSA), Lord Turner, has criticised the current system of free banking in the UK, which was first introduced in 1985, claiming that it damages both competition and customers.
He also argued that it presents a barrier to new entrants in the financial services industry, preventing full competition and providing an incentive to lenders to mis-sell products to the public.
Lord Turner told the Treasury Select Committee (TSC) “It is the case that free-if-in-credit banking does create a bit of a barrier to new entrants. 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. Because of that, there is a desire for them to sell products that are not appropriate.”
He added “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.”
Lord Turner also said he believed that there is an argument for breaking up the banks to make them more competitive, and that an internal separation within banks between their retail and investment businesses should be considered.
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