Britain's big banks call for upstart rivals to share burden of free accounts

LONDON (Reuters) - Britain's so-called challenger banks should be compelled to share the burden of providing loss-making fee-free basic accounts to the financially vulnerable, executives from Barclays (BARC.L) and Co-Operative Bank (COOBF.PK) said on Tuesday.

The government has been keen to encourage greater competition in Britain's banking sector, but the dominant established players clearly feel that fledgling lenders such as Aldermore (ALD.L) and Metro Bank are gaining an unfair advantage.

Speaking to the House of Lords committee on financial exclusion, Barclays Managing Director Catherine McGrath and Co-Op Bank's Director of Products Matthew Carter said that their smaller rivals are cherry-picking more lucrative customers.

"The basic bank account is a loss-making product but part of our investment in society," McGrath said in response to a question on whether banks in Britain should all be forced to provide basic accounts.

Both McGrath and Carter said they would be in favour of spreading the cost of running such accounts across the banking industry.

Neither named rivals benefiting from a more niche focus, but Carter said that newer lenders are specifically targeting affluent urban customers rather than sharing the responsibility for financial inclusion.

Barclays and Co-Op are among a list of nine lenders that in January launched fee-free basic accounts aimed at helping those in financial difficulty or who have been unable previously to open an account.

The nine banks agreed to provide the accounts in a voluntary undertaking with the Treasury.

The government should also close a loophole that could allow EU nationals in Britain to open the fee-free basic accounts regardless of their financial circumstances, Barclays' McGrath said.

"It's not right that somebody from outside the UK could be offered an account with a different price structure to someone in it," said McGrath, adding that the basic accounts should be provided only to those in genuine financial need of the fee-free services.

(Reporting By Lawrence White; Editing by David Goodman)