LONDON Britain may need to call time on free bank accounts as poor transparency on fees could be fuelling the mis-selling of financial products, a top banking regulator said on Thursday.
Bank of England executive director for banking supervision Andrew Bailey also hinted Britain's main interest rate would remain at a record low 0.5 percent for the foreseeable future, and that domestic banks were ready if Greece ditched the euro.
Bailey said the "myth" of free banking enjoyed by customers when not overdrawn made it hard to link costs to products and services received.
"I worry also that this unclear picture may have encouraged the mis-selling of products that is now causing so much trouble," Bailey said in a speech made available to the media.
Barclays, HSBC, Lloyds and Royal Bank of Scotland are part way through paying the bulk of about 9 billion pounds ($14 billion) compensation for mis-selling loan insurance.
It was the latest scandal over two decades and more of mis-selling products from pensions to endowment home loans.
"In short, I think that the reform of retail banking in this country cannot move ahead unless we tackle the issue of free in-credit banking, and have a much better sense of what we are paying for and how we are paying," Bailey said.
It would be hard for industry, as a whole, to introduce fees as this could be seen as collusion, he said. "So, it may require intervention in the public interest, not least because it is a way to encourage greater competition."
Bailey's words carry clout as he has been designated as second in command of the BoE's new Prudential Regulation Authority which will supervise lenders and insurers.
There are 120 million current and savings accounts at Britain's high street banks and, so far, no bank has broken ranks to start charging, fearing it would lose business.
"We will be discussing his thinking with him and with our customers and consider the options," British Bankers' Association chief executive Angela Knight said.
Steve Smith, a director at Lloyds Banking Group speaking at the same industry conference as Bailey, said a previous proposal on bank reform - the Vickers report - had sensible proposals on easier account switching and fee transparency but the Financial Services Authority and Office of Fair Trading have "not run with them".
"The plea from me is if you are going to be like a dog with a bone on this ... is to actually get the Vickers recommendations implemented," he said.
Bailey responded that he rarely came across bankers who disagreed with charging and that Vickers needed implementing.
Turning to the broader sector, Bailey said pressure on interest margins and income at banks will remain.
He also expected risk managers at banks "to take a cautious view and assume continuing low interest rates for the foreseeable future."
Last year, Bailey called on banks to prepare contingency plans in case countries left the euro area.
Markets are betting Greece may exit the euro but Bailey signalled British banks would be ready but not without a cost.
"Whatever happens in the euro area, there is a cost of adjustment, and that too will act as a drag on the returns earned by banks, and in the worst scenario presents a clear threat to financial stability."
He reiterated the BoE's view that the euro zone crisis remained the biggest risk to Britain's financial stability.
Bailey also hinted that pressure on banks in Britain to build up capital and liquidity buffers could be eased to avoid adverse effects on the economy and uncertainty for lenders.
($1 = 0.6363 pound)
(Editing by Dan Lalor and Kenneth Barry)