By Marcus Leach

The Government's plans to ring-fence banks, a move that will see them separate their retail businesses from their investment arms, has been met with scepticism.

The Parliamentary Commission on Banking Standards believe that the measures "fall well short of what is required", whilst the CBI warn that there should be a major shift in culture within the industry.

The government's bank reforms will go before Parliament early next year. The Treasury said it was committed to reforming the banking sector.

The Parliamentary Commission on Banking Standards wants the government to "electrify" the fence so banks cannot make holes in it.

The Parliamentary Commission on Banking Standards, known as the Banking Commission for short, was asked by Chancellor George Osborne to study the draft version of the government's Financial Services (Banking Reform) Bill.

Andrew Tyrie, chairman of the Banking Commission, said that the electrification of the ring fence should include the regulator being able to force the full separation of a bank's retail and investment divisions, if the lender was found to be trying to break the fence.

"The proposals as they stand [in the Bill], fall well short of what is required," he said.

"Over time, the ring-fence will be tested and challenged by the banks. Politicians too could succumb to lobbying from banks and others, adding to pressure to put holes in the ring-fence.

"For the ring-fence to succeed, banks need to be discouraged from gaming the rules. All history tells us they will do this unless incentivised not to.

"That is why we recommend electrification. The legislation needs to set out a reserve power for separation - the regulator needs to know he can use it."

Meanwhile, Matthew Fell, CBI Director for Competitive Markets, said that the reform was the right way forward, but was not the complete answer.

“The right way forward on bank structures is to implement the ring-fencing proposals as set out in the Banking Reform Bill, which strike a balance between increasing financial stability and giving growing companies access to the services they need under a universal banking model," he said.

“It is important that banks implement the ring-fence fully. Whilst the threat of full separation might help to concentrate minds, such a move would be detrimental to businesses, preventing them from accessing the full range of services they need from a single provider.

“Having addressed the important question of structure, the Commission should now shift its focus to driving a culture change where the customer is front and centre of everything that banks do, where increasing competition should play a major part.”

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