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Plans To Protect Savers' Money Revealed

(c) Sky News 2012

Plans to improve protections for savers' money in the event of a bank collapse will be revealed by the chancellor, George Osborne, later today.

In a speech to City grandees at the Mansion House in London, the chancellor will propose reforms to banking rules and regulations based on the recommendations of the Independent Commission on Banking (ICB) to promote competition and reduce the risk of future bank failures and bailouts.

Mr Osborne is expected to propose that individual depositors are first in line to get their money back in case a bank fails, leaving bondholders and corporate creditors to share whatever money remains.

But despite having promised to implement the recommendations in full, the government will water down the "ring-fence" around ordinary savers' money in a bank's high street business to ensure it cannot be used to fund risky investment banking activities.

The banking industry has lobbied against the "ring-fence" saying that being forced to hold more money in reserve will increase the cost of doing business and that higher costs will have to be passed on to customers.

Sky's City Editor, Mark Kleinman, has revealed that the body which manages the taxpayer's stakes in Britain's bailed-out banks has also objected to some of the ICB's proposals.

UK Financial Investments, which oversees tens of billions of pounds-worth of Government-held shares in Lloyds Banking Group (LSE: LLOY.L - news) and Royal Bank of Scotland (LSE: RBS.L - news) , has said it is concerned about the added bureaucracy of having separate boards for the ring-fenced bank.

In a concession to industry chiefs, the Chancellor will allow a limited number of investments to be offered through the ring-fenced bank such as "hedging tools" which are sold to small businesses to guard against interest rate and currency rate fluctuations.

The details will be contained in a White Paper which will remain open for further consultation before draft legislation is written in the autumn.

New rules to make it easier for customers to switch between banks are due to come into effect in 2013.

The wider reforms are expected to be written into law before the next general election in 2015 but the ICB has recommended giving banks until 2019 to implement them.

Britain's biggest bank, HSBC (LSE: HSBA.L - news) , has threatened to move its headquarters elsewhere if the government proceeds with new rules that will disadvantage it in competition with international rivals.

Professor Philip Booth from Cass Business School said: "It is important that George Osborne does not impose costly policies that will have no benefit.

"The ring-fencing of deposit-taking and other banking functions from each other is largely irrelevant and may drive banks away from the UK."

Business consultants Deloitte have welcomed the long awaited publication of the government's intentions.

David Strachan, co-head of the Deloitte centre for regulatory strategy, said: "So far, banks are understandably holding off committing to the design of a ring-fence that may ultimately not meet the Government's criteria.

"Given the complexities and execution risks involved in restructuring of this magnitude, it's essential that banks and investors first get the clarity they need and then there is enough time for the banks to implement all this properly."