July 28 2014 Latest news:

The UK’s high-street banking operations should be ring-fenced from more risky investment banking operations in order to protect savers’ deposits.

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That is one of the key recommendations from the Independent Commission on Banking (ICB), which has published its interim set of proposals.

The commission has also called for Lloyds Banking Group – the parent of brands including Lloyds TSB, Halifax and Bank of Scotland – to sell more of its branches in a bid to improve competition.

The ICB has not opted for the extreme suggestion of breaking up the banks, but the report said internal firewalls should exist to keep banks’ retail and investment operations separate.

The commission said improving the system required making banks better able to absorb losses; making it easier and less costly to sort out banks that got into trouble; and curbing incentives for excessive risk-taking.

It added: “These goals are inter-related. The more that banks’ owners and creditors (other than ordinary depositors) stand to lose when things go badly, the stronger are their incentives to monitor risks in the first place, and the greater is their capacity to shoulder losses without damage to others when risks go bad.”

The ICB said that the issue of “too big to fail” had not yet been fully addressed, with the UK’s biggest banks still effectively enjoying a guarantee that the taxpayer would step in to save them in any future crisis.

“Banks ought to face market disciplines without any prospect of taxpayer support, but systemically important banks have had and still enjoy some degree of implicit government guarantee,” it said.

Which? chief executive Peter Vicary-Smith said: “This report is a step in the right direction. The financial crisis highlighted serious failings in our banking system and we need root to branch reforms to prevent it from happening again.

“We welcome the intention to ring-fence the retail banking services we rely on every day, but banks mustn’t be allowed wiggle room to avoid fundamental change.

“Banks must be allowed to fail without bringing down the rest of the economy and we must never again be faced with a situation where consumers pay the price for the failures of the banking system.”

He added: “Competition on the high street is at an all-time low, with the three biggest retail banking groups consisting of two that would have collapsed without taxpayer support and one that has a woeful record on customer services. This is not the template for a market that works well for consumers.”

However, Andrew Hagger, an analyst at Moneynet, said there was already sufficient competition in the retail banking sector.

“Some banks are even offering financial handouts to switch, and that’s the way it’s been for a few years now,” he said.

“If there’s no competition out there at the moment, I’d like to know what you call it. Providers have been falling over themselves in the last 12 to 18 months to offer loyalty incentives to their current account customers, realising at long last that looking after existing customers is equally as important as recruiting new ones.”

Meanwhile, a campaign group demanding compensation for 800,000 small shareholders following the hasty purchase of HBOS by Lloyds at the height of the financial crisis said the commission’s comments on that takeover vindicated its position.

“The ICB’s unqualified criticism of how the Labour government undermined competition law to gerrymander the merger of Lloyds with HBOS is a complete vindication of Lloyds Action Now’s fight to hold the authorities to account,” said Nicholas Shaw, chairman of Lloyds Action Now.

The ICB’s final report will be published in September.

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