To bring an end to mis-selling of products like payment protection insurances (PPI) that cost the industry billions in customer pay-offs, Bank of England (BoE) executive director Andrew Bailey calls time on free banking.

Dubbing free banking as ”a dangerous myth”, Bailey warned that customers may think their account is free, but the true costs are actually hidden. He told the Westminster Business Forum that the hidden costs would include low interest rate that many banks offer on current accounts.

“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,” said the executive director of BoE.

Bailey, who is seen as a strong contender to head the new Prudential Regulation Authority, explained that the situation has made it difficult for banks to understand the cost of the services they provide, which may have contributed to the mis-selling of financial products.

Britain is one of the three countries in the world - along with Australia and India- where customers do not pay a fee for their current account. Notably, British banks including Barclays, Lloyds, Royal Bank of Scotland and HSBC are paying out about £9 billion in compensation for mis-selling PPI.

“It is a myth because nothing in life is free; rather, it means that we pay for our banking services in ways that are hard to link to the costs of the products we receive. This can distort the supply of banking services”, Bailey said.

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