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The Treasury has set out plans on how ring-fenced retail banks will operate in its latest follow-up to the Vickers’ Independent Commission on Banking.

The 86-page White Paper, Banking Reform: Delivering Stability and Supporting a Sustainable Economy, was published in response to recommendations by the commission to ring-fence retail and investment banking activities

In the report the Treasury suggested initially ring-fencing deposits owned by individuals and small and medium-sized businesses, rather than other products such as mortgages.

It said: “The government proposes to take a power to make secondary legislation to define additional mandated activities, which must therefore only be undertaken by ring-fenced banks.

“The government’s expectation is where banks carry out other functions important to the domestic economy, such as the provision of domestic credit to households and SMEs, and payment and transaction services, these will be undertaken by their ring-fenced entities.”

The ring fence would apply to lenders with £25bn of mandated deposits, according to the FSA.

The document also proposed that high net-worth individuals with between £250,000 and £750,000 of “free and investable assets” with a single bank would also not fall into the ring fence.

The government has also asked for views on how structured deposits should be treated and suggest a ring-fenced bank may be permitted to provide “simple” derivative products.

Listing specific activities that should be prohibited for ring-fenced banks, it highlighted trading in securities or derivatives, secondary market purchases, securitisation of assets outside the ring fence and underwriting of securities issues.

According to the document, all legislation will be introduced by the end of parliament in May 2015, with banks given until 2019 to comply.

The British Bankers’ Association welcomed the proposals but warned that the cost of the changes could cost £7bn a year.

Richard Lloyd, executive director of consumer watchdog Which?, described the proposals as a “major step towards restoring consumer confidence and transforming the culture of banking”.

Bob Lyddon, managing director of the international banking association IBOS, claimed the proposals did not address the cause of the financial crisis.

He said: “The problems were not caused within investment banking divisions of big universal banks, but in secondary banks that were an instrument of government policy. When the whole model blew up the damage naturally fell on to the banking system.”

Mr Lyddon claimed the measures would distract attention by introducing measures that were irrelevant to the causes of the crisis and would only cause damage to banks’ international network

Nick Evans, financial planner for Hertfordshire-based One Life Wealth Planning, said: “If this brings confidence back to the UK banking system, that is a good thing. However the costs have to be passed on somewhere.”

Link to FT Adviser article, June 2012