LONDON (Reuters) - British banks' practice of offering free current or checking accounts for customers who remain in credit is unsustainable and increases the risk of future mis-selling scandals, a report by consultants PwC argued on Monday.
Most major banks in Britain such as Lloyds and Barclays offer free banking alongside paid-for accounts providing perks such as travel and mobile phone insurance.
But the policy remains controversial and some politicians, regulators and bankers have called for it to end, so banks don't try to squeeze profits from customers elsewhere. They say ending it would make charges more transparent and improve competition and levels of service.
Steve Davies, retail banking leader at PwC, said current accounts were not as free as they seemed.
"UK current accounts are not free at all and are paid for through overdraft charges, penalty fees and uncompetitive or zero rates of interest," said Davies.
"The free banking model stifles innovation and competition," Davies added, noting it also made it difficult for new entrants whose presence many see as vital to increase competition.
"It requires new challenger banks to achieve scale very quickly if they are to survive and it fails to reward banks that come up with new ideas as costs cannot be recovered," he said.
The report, based on a survey of over 2,000 people, showed a majority were aware accounts appearing free can carry hidden charges. However, one in two said they would be likely to change banks if an upfront fee was introduced instead.
Nearly two-thirds said they were not prepared to pay anything up front and 27 percent said they would not pay more than 10 pounds ($15) a month.
The issue is already being looked at by Britain's competition watchdog, which is considering whether banks should charge customers for holding their personal current accounts as part of a wider inquiry into the industry. [ID:nL6N0SW1KG]
Andrew Bailey, head of the Bank of England's Prudential Regulation Authority, has called free banking a "dangerous myth", while some senior bankers also want it to end.
However, the boss of Lloyds, Britain's biggest retail bank, said in November free banking should remain and authorities should not impose charges as part of attempts to shake up the market. [ID:nL6N0TG2Q2]
($1 = 0.6633 pounds)
Editing by David Holmes