British banks face their biggest shake-up for years as a result of proposals aimed at promoting financial stability and competition. But will the proposals safeguard our savings and prevent banks running up debts so large they need governments to bail them out? Or will the changes make no difference in the event of another crisis? Stuart Arnold asks what it all means and answers the key questions which arise.

Q: Who is behind the review?

A: The Independent Commission on Banking (ICB), which was set up last year to conduct a full review of the banking sector at the behest of the Coalition Government, and yesterday published its final report.

Q: What are the main recommendations?

A: The report says banks should ring-fence their high street banking businesses from their global wholesale and investment banking arms. The ring-fenced part should have its own board and be legally and operationally separate from the parent bank. Banks should also set aside a larger cash base than currently required to cushion the blow of potential losses or future financial crises. It also suggests measures to improve competition in the UK banking sector. This includes referral for a competition investigation in 2015.

Q: Why is all of this said to be required?

A: The overall aim is to prevent another taxpayer-funded bail-out of the banking system – which was preceded by Northern Rock’s nearcollapse in 2007 – and make it more robust, as well as improve competition. A retail ring-fence would aim to protect everyday banking functions, such as current and saving accounts, from riskier investment activities. If a bank found itself in trouble the idea is that savings could be salvaged from the wreckage of a collapse.

In theory, a shakey investment arm could be allowed to live or die without the Government – or taxpayer – getting involved.

Q: What is the timetable for all this?

A: Banks will be given up until 2019 – longer than expected – to implement the suggested reform.

However, the commission says it will be good all round, not least for financial markets, if the Government could establish its policy by the end of the year, and pass the legislation before the 2015 General Election.

Q: How much will this all cost?

A: The report’s author, Sir John Vickers, who is chairman of the ICB and a former boss of the Office of Fair Trading, says the proposed reforms will cost between £4bn and £7bn, although the banks themselves believe the real figure will be much higher.

Q: Where do the “big four” – Lloyds, Barclays, Royal Bank of Scotland and HSBC – stand on this report?

A: Lloyds will be relieved since an interim version of the report, out in April, suggested it should sell more than the 632 branches it already intends to get rid of in order to comply with EU rules on state aid.

After intensive lobbying by the bank, this idea is no longer explicitly detailed in the final version. Instead, the report recommends that the “Government seek agreement with Lloyds Banking Group to ensure that the divesture leads to the emergence of a strong challenger bank”.

Barclays is said by many analysts in the City to have the most to fear from the ring-fencing element of the proposals, since its large investment arm, Barclays Capital, is bolted on directly alongside its high street bank. Its chief executive, Bob Diamond, says ring-fencing is not his “first choice”.

Meanwhile, the Royal Bank of Scotland, which is more than 80 per cent owned by the taxpayer, is in a similar position with an investment banking business operating directly alongside a high street bank. Analysts have warned that its profits could take a £1bn to £2bn hit over the next three years, depending on how the ring fence is structured. Its chief executive, Stephen Hester, previously claimed such a move “would certainly increase costs”.

For its part, HSBC also has huge concerns about any ring fence, believing its corporate lending division could have its ability to lend severely reduced. There has been a suggestion that management could seek to move the firm’s headquarters abroad – possibly to Hong Kong – to avoid any negative impact.

HSBC’s chief executive Stuart Gulliver also recently indicated job losses could result from the ICB’s findings.

Q: What other reaction has there been?

A: The British Bankers’ Association, which represents the banks, says careful consideration must be given to the reforms and the wider impact on the economy’s recovery.

The Federation of Small Businesses says the ICB proposals would make banking safer for both businesses and current account holders.

It says switching banks is a problem for many small businesses because of the time and cost, describing it as a slow and complicated switching process.

The union Unite claimed the proposals would kick “overdue reform of the banking sector into the long grass” and would add to the uncertainty of banking workers, many of whom in the sector have recently lost their jobs.

Q: What impact will this have on customers?

A: Customers’ deposits will be protected from high-risk investment banking arms. However ring-fencing is likely to be costly for the banks and lead to higher costs, such as increased mortage charges. Banks could also save money by reducing saving rates.

It should, however, be easier to switch bank accounts. The ICB’s report recommends the early introduction of a system by September 2013 making it easier to move accounts within seven days and one that is free of risk and cost to customers.

Q: What happens next?

A: The Government will have to make the relevant regulatory changes by introducing new law through Parliament. Chancellor George Osborne yesterday welcomed the report and said he would act now to implement it.