Free banking in Britain is making it harder to stamp out the mis-selling of complex financial products as lenders chase shrinking profits in the face of record low interest rates, the Financial Services Authority said on Tuesday.
The country is shaking up its financial industry supervisory system to apply lessons from the crisis that saw banks bailed out by taxpayers.
It also wants to draw a line under two decades of mis-selling which have cost the industry some 15 billion pounds in compensation to customers but this is proving difficult.
The exposure to complexity or mis-selling is as great as it was, Martin Wheatley, managing director at the FSA, told reporters.
He will publish stricter rules later this year to limit the sale of unregulated collective investment schemes (UCIS) to professional investors and stop firms that still offer them to high street customers.
Players have found their way through the rules to get to a wider market, Wheatley said.
But banning products was an emotive issue and he preferred making sure that products like UCIS were sold to appropriate customers, he said. The FSA fined Topps Rogers Financial Management 97,600 pounds last month for advising 94 customers to invest 12 million pounds in UCIS.
Wheatley said there are still problems in how financial salespeople are incentivised, often pushing one particular product on a customer rather than offering a real choice.
Banks are also under pressure to hide fees in complex products to pay for the free banking consumers expect.
I think we have to get to transparent pricing, said Wheatley, who will head Britain's new Financial Conduct Authority to regulate more than 25,000 firms from 2013.
Wheatley said he was not advocating an end to free banking but wanted to send a shot across the bows of industry to come clean over true costs and alter somes sales practices.
Free banking is part of the dilemma, Wheatley said.
There are 120 million current and savings accounts at Britain's big high street banks like Barclays, HSBC, Lloyds, Santander and RBS.
We are not hearing that any banks are suggesting removing the free banking model, a spokeswoman for the British Bankers' Association said.
Wheatley, presenting the FSA's annual retail conduct risk outlook, wants the financial services industry to move away from complex products where the real cost is bundled in different layers to simpler products that deliver reasonable value.
But financial institutions are still pushing more opaque structures to generate profits while consumers, faced with very low interest rates, were tempted to take more risks.
We think the financial services industry has got a lot of trust to rebuild with the consumer, Wheatley said.
(Reporting by Huw Jones; Editing by Greg Mahlich)