UK banks will have to ring-fence their retail services from their investment activities, recommends the Independent Commission on Banking in its final report.
Published today, the report suggests that creating a clearer divide between banks' retail and investment activities will protect consumers from excessive risk - and cost.
In brief, the report states that "domestic retail banking should be inside the ring-fence, global wholesale/investment banking should be outside".
The ICB recommends ring-fencing over total separation so that banks will be able to fund retail activities with capital from their investment arms, share expertise and information between the two sectors and make it easier for customers to use services from both sides.
The Commission, chaired by sir John Vickery, is urging the government to enforce these proposals "as soon as possible", and says that they should be introduced no later than 2019.
The Treasury has issued a statement welcoming the ICB report: "The chancellor considers it to be an impressive report and an important step towards a new banking system that supports lending to businesses and families, supports the economy and jobs, but doesn't cost the taxpayer billions of pounds when it goes wrong."
It is now widely expected that the chancellor, George Osborne, will announce future plans in response to the report in his autumn statement on 29 November.Consumer champion Which? also welcomes the ICB's recommendations. Peter Vicary-Smith, chief executive of Which?, says: "Seven in 10 people tell Which? they back the ring-fencing of essential consumer banking from high-risk investments. A clear, high and strong ring-fence will allow failing banks to go bust without taking our deposits and the rest of the economy with them."
More competition in banking and the implementation of a smoother switching process for customers are other issues raised in the report.
In the UK, the four largest banks account for 77% of current accounts and competition has decreased due to the Lloyds/Halifax Bank Of Scotland merger, as well as Santander buying up smaller operations.
Selling off state-owned stakes in Lloyds, Royal Bank of Scotland and Northern Rock will go some way to address the lack of competition.
The British Bankers' Association (BBA) says that UK banks are already in the process of implementing reforms set out by the Financial Stability Board and the Basel Committee on Banking Supervision.
These reforms demand banks increase their levels of equity capital so as to absorb future losses better and be more liquid.
The BBA thinks that the ICB ring-fencing proposals "cover the same important issues" and warns that any further changes should be "carefully analysed" in relation to the other international reforms: "It is vital that the full impact any further reforms will have on the economy, the recovery and banks' ability to support their customers in the UK is understood."