'Ring-fencing' of banks poised to start within weeks of Lords vote

Critics raise fears of end to 'free' banking and branch closures in sweeping reforms

The most sweeping reforms to banking in more than a generation face their final hurdle in the House of Lords tonight amid criticism that they could spell the end for "free" retail banking.

The Banking Reform Bill is back in the Lords after an opposition amendment calling for licensing of bankers was defeated in the House of Commons after the Government brought forward its own version.

The bill's key measure is the creation of an electrified "ring fence" around retail banks to protect them from risky investment banking. Banks that try and breach the rules face being broken up.

If the bill in the form approved by the Commons is accepted it could receive Royal Assent in time to come into force in the new year.

The 200-plus page bill – it started off at 35 pages – will apply the force of law to most of the recommendations made by the cross party Parliamentary Commission on Banking Standards, chaired by Conservative MP Andrew Tyrie.

As well as the new ring fence, there is also a plan for an independent review of the effectiveness of the fence once it becomes operational – a move that was first recommended by Sir John Vickers' Independent Commission on Banking. If the ring fence is found not to be working, the entire British banking industry could be split apart at a later date.

The Government at first resisted many of the Tyrie Commission's more radical proposals but was forced to cave in under sustained pressure.

Other measures added to the bill include a requirement for the Prudential Regulation Authority (PRA) to prepare a report on proprietary trading – which sees banks placing bets in the market with their own money – soon after the ring fence comes into effect, to be followed by an independent review of the activity.

There will also be a new senior managers' regime to hold top bankers to account, while the PRA will have an objective to promote competition. Watchdogs will also have to hold yearly meeting with the auditors of firms which the PRA considers are important to the stability of the UK financial system.

However, a report from Policy Exchange, the right-leaning think-tank, has voiced fresh concerns that banks could be obliged to pass on extra costs to retail customers if the ring-fence plan is enforced too rigidly and business is lost to other countries. "Inevitably, this mix of much higher costs and lower revenues will be passed on to individuals and SMEs [small and medium-sized businesses]," said Policy Exchange, which warned of "further closures of high street branches and even the end of 'free' banking".

Meanwhile, City bankers expect their bonuses to soar 44 per cent this year after a strong performance by stock markets, according to new research from recruitment firm Astbury Mars-den. The average bonus for managing directors – just below board level – is set to rise £166,955, or around 115 per cent of their average salary.