Banks must be told to stop offering free current accounts if Britain wants to stamp out mis-selling scandals, a senior regulator said today.

Andrew Bailey, executive director of the Bank of England, describes free banking as a "myth" as it distorts the supply of banking services and encourages banks to push up fees elsewhere in their business.

Key Points

  • Senior regulator calls for end to free banking
  • Says free banking is a 'myth'
  • It encourages banks to push up fees elsewhere

He says regulatory intervention may be the only way to bring about change as it would be hard for a single bank to break ranks without losing business.

Millions of Britons still enjoy free banking and there is likely to be a furious reaction at any attempt to introduce fees for standard banking services, even though other European countries generally charge and it could mean lower costs for other services.

Bailey says: "I don't think we will have a retail banking industry that is properly serving the interests of the public until we tackle the dangerous myth of free in-credit banking."

He believes the price of banking to consumers varies too much depending on the services they use.

'Encouraged mis-selling'

In his speech to the Westminster Business Forum, Bailey adds: "I also 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."

The banking industry is currently paying out billions of pounds in compensation to customers mis-sold payment protection insurance (PPI).

Bailey adds: "It is hard for a single bank to break out of the existing situation without appearing to raise the price of its service to customers.

"And, it is hard for the industry as a whole to break out without appearing to collude. So, it may require intervention in the public interest, not least because it is a way to encourage greater competition."