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UK regulator to have last word in retail bank reform

Friday, 12 Oct 2012 | 10:52 AM ET

LONDON, Oct 12 (Reuters) - Britain's main financial regulator will decide what activities the country's retail banks are able to carry out under a new reform aimed at shielding taxpayers from having to bail out the industry again.

The draft Banking Reform Bill issued on Friday includes the requirement for banks to separate their domestic retail business form other bank operations, but it said it will leave much of the detail on the scope of this so-called ring-fencing to secondary legislation.

That effectively allows the successor to the current Financial Services Authority to decide what banking activities can be undertaken within the UK retail banking operations. There remains uncertainty on what the ring-fenced business can and cannot offer, such as providing derivatives services to customers.

The reform bill, which also gives savers higher priority in the event lenders hit trouble, is aimed at implementing many proposals made by an independent committee earlier this year. Legislation will be enacted by 2015 and reforms in place by 2019, the government said.

"The draft Bill appears to leave a lot of detail to be determined in secondary legislation. We will press vigorously to find out what that is going to contain," said Andrew Tyrie, the chairman of a Commission on Banking Standards that will study the proposals.

The government said the regulator is best placed to oversee,

monitor and update rules and "respond flexibly" as banking practices evolve.

Tyrie's Commission will report by Dec. 18, and a bill will be introduced in Parliament early next year.

Britain, which used to pride itself on its light-touch regulation, is pushing harder on reforms than many countries after being one of the nations hardest hit by the 2008 financial crisis, but has said it is keen for consistency across Europe.

It said the UK ring-fencing model was compatible with proposals put forward this month by an EU advisory group that wants banks to separate their trading activities from retail deposit-taking.

A report by the Independent Commission on Banking, chaired by Oxford University academic John Vickers, formed the basis for Britain's reforms, although some of the ICB's proposals will come into force through European or global regulations so are not included in the Reform Bill.

The proposals included in the Reform Bill would cost the industry between 2 billion and 5 billion pounds ($3 billion and $8 billion) a year, the government estimated.

There will also be a one-off transitional cost of between 1.5 billion and 2.5 billion pounds and the reforms are likely to reduce the value of the government's stakes in Royal Bank of Scotland and Lloyds by up to 5 billion pounds, it estimated.

But the government said the cost was worth it.

"The benefits of the preferred option will accrue from increased financial stability," it said.

($1 = 0.6234 British pounds)

(Reporting by Steve Slater; Editing by Hans-Juergen Peters)

((steve.slater@thomsonreuters.com)(+44)(0)(20 7542 4367 and follow me on twitter @reuterssteves))

Keywords: BANKS BRITAIN/REFORMS