Cost of biggest ever banking shake-up 'will fall on the customers'

Announcement: George Osborne has unveiled radical new banking reforms

Announcement: George Osborne has unveiled radical new banking reforms

Bank customers could bear the brunt of the costs involved in the biggest-ever shake-up of the industry, experts warned yesterday.

The Chancellor admitted yesterday the radical reforms will cost British banks up to £8billion a year to restructure their businesses.

But it is feared these extra costs will simply be passed on to customers in the form of higher mortgage rates and lower savings interest.

The warning follows the findings of an independent investigation into Britain’s banking industry, which was commissioned by the Government in the aftermath of the credit crunch in 2007 and 2008.

The Independent Commission on Banking, led by Sir John Vickers, revealed its proposals in September, and Chancellor George Osborne said yesterday he will accept and implement the changes in full.

Speaking to MPs yesterday, Mr Osborne said: ‘Our objective is to make sure what happened in Britain never happens again.’

At one point, the taxpayer had to fork out £1,200billion to support the banking industry.

The changes will be far-reaching, particularly the creation of a ‘ring fence’ to be built by all banks to separate their customers’ deposits from the riskier investment banking division.

It will also become easier to switch current accounts, with the process being completed ‘within seven days’. One of the aims of the reforms is to end the dominance of the Big Five banks.

RBS: The State-owned giant is set to axe its investment banking division

RBS: The State-owned giant is set to axe its investment banking division

But the shake-up will not happen without costs, with the Government’s own estimate saying yesterday banks face a bill of between £3.5billion and £8billion a year.

It also warns the changes will knock between £800million and £1.8billion off Britain’s annual economic output, but added this is ‘far outweighed’ by the benefits.

Peter Vicary-Smith, chief executive of consumer group Which?, said: ‘These costs could fall on the investment bank, rather than ordinary consumers. But they are already paying the costs of this country’s banking failure.’

He pointed out that it was ridiculous that banks – which are largely responsible for triggering the economic crisis – have seen their wage bill soar from £40billion before the crisis in 2007 to £52billion today.

John Cridland, director general of the CBI, the business lobby group, said: ‘The Government must ensure that the benefits of ring-fencing outweigh the costs.’

Sir John Vickers: His banking report will be implemented over the next few years

Sir John Vickers: His banking report will be implemented over the next few years

In a radical move, Mr Osborne said Royal Bank of Scotland, which is 84 per cent owned by the taxpayer, will have to axe to its so-called ‘casino banking’ division. He said the disgraced bank must be made ‘to clear up the mistakes of the past’, adding: ‘We need to deal with the mess they created.’

The Chancellor said RBS must make ‘further significant reductions’ to its investment bank to ‘scale back riskier activities’. The bank has rushed to the exit, closing its investment banking divisions in countries from Argentina to Kazakhstan, New Zealand to Vietnam, Bahrain to Chile. Sales have also begun, such as its aircraft leasing division, RBS Aviation Capital.

Sir John’s initial proposals had been criticised for a deadline of 2019 – more than a decade after the crisis struck in 2008 – for the reforms to be introduced. Yesterday Mr Osborne said much of the legislation will be introduced in 2015, the year of the next general election. He added: ‘Banks will be expected to comply as soon as practically possible thereafter.’

Labour’s Shadow Business Secretary Chuka Umunna said: ‘Implementing Sir John Vickers’s proposals is a first step towards addressing many of the long-term problems businesses face with our banking system, but we need action to get credit flowing to firms now.’

Last night Mr Osborne’s announcement and continued gloom over the eurozone hit banking shares and saw the FTSE 100 Index fall 22.4 points to 5365. Lloyds fell 1p to 23.5p, and Barclays was down 5.5p at 166p. RBS, which is 83 per cent owned by the taxpayer, was also hit. Its shares were down 0.6p at 19.4p.

Sir John said: ‘The costs and dangers of unreformed banks are plain for all to see.’

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