City finance partners have criticised Government plans to push ahead with proposals that will force Britain's banks to ring-fence their retail banking operations from the investment banking arms within the next eight years.

Banks will have until 2019 to implement proposals in Sir John Vickers' Independent Commission on Banking report, which was released today (12 September) and called on the Government to enact the reforms as soon as possible.

Despite anticipating a surge of work advising banks on the reforms, partners argue that the final report is too hardline in its recommendations, and will therefore damage the competiveness of the UK financial services sector.

The reforms – which are intended to ensure that in the event of a new financial crisis investment banks can be allowed to fail without affecting retail depositors – confirm proposals first outlined in Vickers' (pictured) interim report earlier this year.

These include an obligation on banks to significantly increase the amount of equity capital they hold to at least 10% of their assets, compared with an EU-wide requirement of 7%, with the biggest banks to have to put in place larger buffers. It also adds more detail to how the ring-fenced operations should be formed, confirming that the ring-fenced part must have their own board of directors.

Some partners have branded the rules, which are expected to cost the banks billions in compliance, as "draconian", fearing that they could undermine the City's position as an international financial hub and therefore ultimately lead to less work for finance lawyers.

Although banks have until 2019 to implement the changes, City lawyers predict banks will have little grace period for working out their compliance plans, with the Financial Services Authority (FSA) potentially contacting banks within months to discuss their plans.

Norton Rose financial services regulatory partner Peter Snowdon said: "For lawyers, the news is likely to bring work in the sense that the split, as well as the new capital requirements, will require a significant amount of legal advice. Of course, if the banks choose to leave the UK that would mean less work for City lawyers, but I would not want to predict what will happen in that regard. When it comes to international competitiveness it may make the UK a less attractive place to set up a bank."

Allen & Overy regulatory partner Bob Penn said: "The proposals are more draconian than expected, but tempered by the long lead-in time for implementation.

"Ultimately, the Commission is making a bet that the implementation and ongoing costs associated with ring-fencing and higher capital requirements for large UK banks will outweigh the costs of future crises. This may be correct, but there is no avoiding the fact that those costs will be borne by bank customers: so far as domestic banking is concerned, customers have nowhere else to go."

CMS Cameron McKenna financial services head Paul Edmondson said "The independence of ring-fenced retail banks and their governance ethos, which Vickers' report requires, are designed to create cautious risk-adverse players. How will they compete with marauding European banks that are free to maintain their universal banks and their pre-crisis culture, funding models and lighter touch regulation?"

More reaction to the plans

Mark Kalderon, partner in Freshfields Bruckhaus Deringer's financial institutions group: "Capital ratios will obviously be the key cost for the banks; however, there is a significant amount of red tape that will increase spend and staffing requirements. As it stands, some institutions will be required to implement a dual process of disclosure similar to that of a UK listed company for separate entities under a parent. Dual reporting will increase compliance costs and these will inevitably be passed on to the consumer.'

"Additionally, ring-fenced banks will be required to have largely separate operations, with intra-group dealings only carried on at arm's length, thus increasing the complexity, and presumably the cost, of the provision of intra-group services."

Nabarro corporate partner Alasdair Steele: "Insurance companies and other financial businesses will find their sources of borrowing restricted as they will be unable to borrow from ring-fenced banks. The consequent effect on their borrowing costs – and therefore the competitiveness in a global environment remains to be seen.

"The restrictions on ring-fenced banks lending to financial businesses will pose a risk to this key sector of the UK economy, depriving it of a source of funding which will be available to global competitors."

Jason Mansell, FSA specialist barrister at 7 Bedford Row: "While the politicians may want to give the appearance of the Vickers Report being a revolution to appease an electorate angry with the City, in reality the process is more likely to be an evolutionary one.

"Whilst the report focuses on more fundamental reforms of the banking system in the short to medium term, pragmatism is likely to prevail. The Government will be loathe to do anything which might derail its deficit reduction strategy and once the PR machine around the report has subsided I suspect it will be business as usual."

Allen & Overy regulatory partner Bob Penn: "There will be considerable concern for UK banks' international competitiveness given the recommendations on primary loss absorbing capacity. Unless there is international consensus on this area, UK financial institutions will be hamstrung in their international dealings."

"Private banks will particularly harshly affected – the requirement to ring-fence will cover private banks offering deposits in the UK, but ring-fencing will prevent them from offering a full array of services to their clients. One likely side-effect is the migration of private banking offerings offshore."

CMS Cameron McKenna partner Paul Edmondson: "Vickers can't have what he really wants – a ring-fence of all UK retail banking – because it is illegal under EU law. Instead of opting for an EU solution he is suggesting a partial ring-fence of EEA retail banking applicable only to those banks unlucky enough to be incorporated in the UK. This reverse discrimination would be a blunder; it would effectively take UK banks out of the EU single market system whilst leaving the UK market open to European banks – and allowing them to ignore Vickers' rules. The government should be pursuing an EU solution unless of course the government were to contemplate the unthinkable, a UK withdrawal from the single market."

SJ Berwin financial institutions partner Andrew Wingfield: "The ICB's proposals totally focus on retail protection and would impose a cost ahead of any bank failure. The costs of restructuring and higher equity capital levels will place returns under further pressure and the ICB's proposal will likely be a Herculean task given that people and IT systems are intertwined within banks."

"Over the next few weeks, it will be interesting to see whether support for the recommendations wanes as the party conference season approaches. However, the message is softened by a long final implementation deadline of 2019, which is intended to synchronise the timeline with the implementation of new international standards under Basel III."

"In our view, all banking reform measures adopted by the UK authorities need to be carefully analysed in order to ensure that the full consequences on the economy and the recovery of banks' ability to support customers is understood."

Simmons City banking head James Bresslaw: "While the report finalises the proposals that were first made by the Commission in April this year, the question remains of just where these recommendations will sit in the wider regulatory landscape, both domestic and international."

Mayer Brown financial service regulatory partner Angela Hayes: "The Vickers Report has given us a domestic solution, at best. What's really needed is better collaboration between regulators across jurisdictions and we are a long way off that at the moment."

Click here to download the full Vickers report from Legal Week Law.