Britain’s banks are to be made safer and subject to greater competition under proposals in a long-awaited report heralding the biggest shake-up of the sector in more than a generation.

While City fears over draconian bank break-ups will be allayed, the Independent Commission on Banking will today propose potentially costly regulatory options, including ring-fencing “essential” services and forcing a broader high street branch sell-off.

Some of the most controversial recommendations from Sir John Vickers’ interim report will regard measures to inject competition into retail banking, a highly concentrated market where Lloyds Banking Group provides almost one in three current accounts. Although a reversal of the Lloyds TSB and HBOS merger will be ruled out, the panel will raise the option of its selling more branches than the 600 it is already having to divest under state aid rules.

Sir John’s report is expected to lay out ways to improve means for retail customers to compare and switch accounts, and to discuss the possibility of a full competition inquiry, recommended by the government, to investigate the highly concentrated retail market.

Barclays, HSBC and Royal Bank of Scotland had feared a recommendation formally separating investment and retail banking operations or restricting their share of the high-street market. Santander UK, the Spanish bank, is among those poised to benefit from greater competition.

Sir John will reject a break-up in favour of building a wall around UK deposit-taking, small business lending and payment systems to insulate those operations in the event of another financial crisis.

While bankers expect those reforms to cost as much as £5bn in extra funding and capital costs, ring-fencing is a far less expensive option than a wholesale break-up, or forcing banks such as Barclays to separately capitalise its sprawling investment banking operations.

The details of reform will be subject of an intense lobbying war as the commission prepares is final report, due in autumn. Ministers are braced for a backlash but are confident that some banks’ threats over leaving London will be found to be baseless.

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