The recent barrage of bank charges claims, and the OFT's upcoming investigation will probably mean more expensive banking and make it harder to choose the cheapest current account.
We don't have free banking. We pay for our current accounts in myriad ways.
In addition to penalty charges for such things as exceeding overdraft limits, we pay interest on overdrafts; receive poor levels of interest on balances in credit; pay for some services directly (e.g. bank drafts), and pay commission on foreign currency and get poor exchange rates. What's more, as a result of our relationship with our banks, we take out all sorts of other products with them, such as loans and credit cards, effectively borrowing our own money at much higher interest rates than we receive in credit.
(It's almost never a good idea to buy insurance, cards, loans, mortgages or anything else from your bank, because they charge a hefty price for your laziness. Take the time to compare these products online. It's much cheaper.)
Now, the Office of Fair Trading (OFT) is expanding its penal bank charges investigation to cover the transparency of all existing charges. The investigation will also look at the consequences of its actions if it manages to stop banks charging penal fees.
Mixed feelings about the wider investigation
I'm wary of the motivation for this investigation. It is likely that the OFT is concerned about offending the millions of current-account holders who never pay penalty bank charges. If penalties are reduced or quashed, these people will have to start paying more for their own accounts, so that the banks can maintain their profits. That's why I believe that this second investigation will be used by the OFT to justify a much weaker decision on unlawful charges.
On the other hand, the OFT can certainly justify the wider investigation, because part of its remit is to ensure that there is a healthy competition between businesses in the same industry. The consumer body will be concerned that the banks will use any ruling as an excuse to increase their profiteering.
Unless it comes up with something innovative, the OFT has two options on bank charges: warn banks to cap them (as it did with credit cards) or take the banks to court over them.
The OFT will be hoping to come up with a win-win solution where bank charges are quashed or greatly reduced, the overall cost of banking doesn't rise, and the costs of banking become more transparent. Achieving all this is impossible. If banks have to reduce their penalty fees and are forced to be transparent about their existing charges, they'll simply come up with all sorts of new ways to charge people.
In fact, I believe that banks will do this anyway, as, one way or another, penalising people for bank charges will become a dead end.
The future of banking
Already we have seen more current accounts introduced that charge monthly fees. first direct charges many of its users £120 a year for paying in less than £1,500 per month. Plus, millions of Lloyds TSB customers have been shifted on to fee-based accounts already, by failing to opt out of the switch.
Over the next few years, it's probable that we will see a steady whittling away of free banking, as each bank pushes more and more people into accounts with fees. It'll be a slow process, as no bank wants to be seen as the first to say 'You're all paying fees now'.
We'll also see current accounts that charge people in many different ways, making it much harder to compare and choose the cheapest product for each individual. It's easier to hide higher charges when a product is more complicated.
I suspect we will have to choose between current accounts that charge monthly fees and those which are free to have, but charge you for each service you use, such as withdrawing money, transferring funds and cashing cheques.
Then there will be accounts that combine the two. We can also expect accounts that pay virtually no interest in return for lower monthly fees or service charges. Plus, they will push harder their packaged accounts, which include things like travel insurance and discounts in selected retailers, but are of very dubious value.
Furthermore, the banks could use all this as an opportunity to earn more profits than they were when they were penalising the minority on a regular basis. They may rue the loss of a small portion of their previous profits, but they will not be scared for their future ones.
The law and ethics
Despite all this, I still want to see penalty charges withdrawn and penalised customers reimbursed. The penalties are unlawful, so people shouldn't be penalised. I must repeat what I've said previously: it is wrong that a minority pay thousands to subsidise the accounts of other, wealthier people. The matter of effective competition keeping banking costs down should be looked at entirely separately.
A word from the wise
David Kuo, In-house Jester (a.k.a. Head of Personal Finance at The Fool), said: 'We hope the OFT investigation brings an end to the practice of robbing Peter to pay Paul, or in some cases robbing Paul to pay Paul without him knowing.'
I'm not sure precisely what this Fool's riddle means, but it sounds like a wise warning to me. We may hope this investigation makes costs more transparent, but, even the costs do become clearer, will that make us any wealthier?
> We can get better deals if we compare current accounts. Comparing and switching is the only hope we have of increasing competition and, therefore, being charged less overall.
> Your Credit Card May Cost You More