The financial regulator has announced a crackdown on banks charging monthly fees for "premium" current accounts.
Banks and building societies which include insurance policies - typically travel or mobile phone cover - with their accounts will have to check that customers would be eligible to make claims.
This announcement has been made by industry regulator the Financial Services Authority (FSA) and will take effect from next March.
Consumer protection
The FSA said that premium current accounts – also known as packaged accounts – now represented around a fifth of the market.
These accounts can cost between £5 and £25 a month.
They often come with complimentary insurance policies as well as other benefits such as lower overdraft rates, access to better mortgage offers, and even free digital music downloads.
But the FSA said it wanted to increase the level of consumer protection around packaged accounts.
From 31 March 2013, providers which include insurance cover must establish whether any new customers would be eligible to make claims under the policy.
Sales staff must flag up any policies which may not be suitable, or under which the account holder is unlikely to be able to claim.
Travel exclusions
For example, many packaged travel insurance policies have upper age limits, or may not cover pre-existing medical conditions.
From next year, banks and building societies will be obliged to point out these exclusions to customers before they sign up for a pay-monthly account.
And once the account is set up, banks will have to provide customers with an annual eligibility statement.
This will reiterate the terms and conditions for each of the packaged benefits, and prompt account holders to check whether any changes in their own circumstances would make them unable to claim on the insurance.
Age limits
The FSA is also considering whether it should force banks to contact customers automatically when they reach any insurance policy age limits.
Sheila Nicoll, the FSA’s director of policy, said: "These products are often referred to as upgraded accounts but if you end up paying for an element you can’t claim on, it’s money down the drain.
"We are closely monitoring the promotion of packaged bank accounts and the new rules will make sure customers know what they’re buying and that they can rely on the product or have the limitations explained before buying."
End of free banking?
The FSA’s announcement comes days after chairman, Lord Adair Turner, said that free banking in Britain was "stifling competition" by preventing new banks entering the market.
Lord Turner said that the practice of providing current accounts at no cost – provided customers stayed in credit – was only possible because banks made large profits elsewhere, for example from loans, credit cards and insurance.
He said: "Many who stay in credit get a good deal, subsidised by others who pay unauthorised overdraft charges and PPI insurance premiums.
"It is not a sound basis for a long-term trust-based relationship between a competitive banking system and its customers."
