FCA signals watchdog open to ending to free banking in Britain

Britain's Financial Conduct Authority "would not stand in the way" of moves to end Britain's free banking model if lenders chose to offset rising regulation costs by charging fees for holding accounts, its CEO said. In remarks prepared for a speech later on Thursday, Nikhil Rathi defended the watchdog's bid to prioritise retail customer protection via its Consumer Duty rules, and said he had heard concerns that regulation had played a role in increasing pressure on banking business models and margins.

"We have always been clear that if business models need to change in response to competition and a changing market, we would not stand in the way," he said. "...the 'free-if-in-credit' banking model in the UK is a market and commercial decision not a regulatory requirement, other than for basic bank accounts," Rathi added, pointing to fee-based approaches in other countries.

Consumer interest groups were critical of Rathi's remarks, with one describing the potential reform as "extremely concerning". "Banks' margins are hardly being squeezed, with lenders enjoying record profits driven by higher interest rates which they've withheld from depositors," Simon Youel, head of policy and advocacy at Positive Money, said.

"It is bad enough that banks are cutting access to in-person services with branch closures - cutting access to free current accounts as well would be another big slap in the face to the public," he said. Rathi, who has led the FCA since October 2020, said the application of the Consumer Duty could also cut compensation levies imposed on financial firms.

The regulator would be "pragmatic" when enforcing those rules, tackling breaches that pose the greatest risk of harm but looking "favorably on firms that have made reasonable efforts to address concerns". "We're not setting out to trip firms up by going after technical breaches," he said, underscoring the cash savings market and insurance products such as premium finance and so-called guaranteed asset protection insurance as particular areas of focus.

Rathi also said the FCA was aiming to "achieve earlier clarity than previous redress events" on the scale of consumer harm from possible overcharging in motor finance. Some of Britain's biggest banks have already set aside hundreds of millions of pounds to cover possible redress linked to the FCA's probe. Some analysts estimate the banks' potential costs could rise as high as 2 billion pounds ($2.6 billion).

"The more quickly and comprehensively firms cooperate with requests for data, the sooner we can conclude our work," he said. Rathi also said it was not the regulator's instinct to seek immediate regulation of advances in artificial intelligence (AI) in financial services. 

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