Bank fees 'could clean up sector'

Charging bank customers for their current accounts could help to "clean up" the sector and prevent further mis-selling scandals, a consumer expert has said.

Calls for banks to become "more honest" about the true cost of their accounts came as a report from consumer group Which? found that some customers are being charged as much as £900 a year for going overdrawn without permission.

John Howard, who formerly chaired the consumer panel at the Financial Services Authority (FSA), told BBC Radio 4 he believes regulators are worried about the reaction of consumers to the possibility of an end to "free" banking.

But he told the Today programme: "There are real concerns that the regulators are trying to address, because they see free in-credit banking as creating distortions in the marketplace, and if we are going to clean up banking, if we are going to make it more trustworthy, those distortions have to be removed."

Outlining the "distortions", Mr Howard said customers simply do not know the real cost of providing their basic banking service.

He said: "We don't know what it is costing us, because we're told we're getting free banking.

"It makes it more difficult for new banks to enter the marketplace because it's a really difficult thing for a new bank to set up and to be able to match this free banking-if-in-credit offer."

He said that another "distortion" is that banks are encouraged to cross-sell other products, which they had done "far too eagerly" in some cases.

The industry's reputation has been tarnished by scandals such as the widespread mis-selling of payment protection insurance (PPI), with the ombudsman expecting to deal with a record number of complaints over the issue this year.

Around £10 billion has been set aside by banks to cover claims being made by people who were sold PPI they did not want or need, in what is predicted to become the biggest consumer financial scandal of all time.