MPs critical of government's banking reform plans 21 December 2012 Last updated at 00:12 Government plans to ring-fence the banks - separate their retail businesses from their investment arms - "fall well short of what is required," a group of MPs has warned. The Parliamentary Commission on Banking Standards wants the government to "electrify" the fence so banks cannot make holes in it. The government's bank reforms will go before Parliament early next year. The Treasury said it was committed to reforming the banking sector. Vickers recommendations The Parliamentary Commission on Banking Standards, known as the Banking Commission for short, was asked by Chancellor George Osborne to study the draft version of the government's Financial Services (Banking Reform) Bill. The government is committed to using the legislation to separate banks' retail banking operations from their investment units. The Commission explained The Parliamentary Commission on Banking Standards was appointed in July following the Libor scandal and other episodes that damaged the reputation of banks in the UK It includes MPs and peers and is chaired by Andrew Tyrie, who also heads the Treasury Committee Members include the next Archbishop of Canterbury, Justin Welby It will report on the professional standards and culture of the UK banking sector It will outline "lessons to be learned about corporate governance, transparency and conflicts of interest, and their implications for regulation and for government policy" So far, it has heard evidence from major figures in the banking sector Evidence has included a warning from RBS boss Stephen Hester that ring-fencing banks' retail and investment arms could increase the risk of institutions needing to be rescued But Barclays chief executive Antony Jenkins told the commission that his bank was "embracing" the ring-fencing proposal The commission has also heard from Paul Volcker, a former chairman of the US Federal Reserve, about his US proposals to ensure bank safety The ring-fence idea was recommended by the Independent Commission on Banking that was chaired by Sir John Vickers and reported in September 2011 This follows last year's recommendation by the Independent Commission on Banking, which was led by Sir John Vickers. Sir John concluded that ring-fencing was the best way to protect retail banking from any future investment banking losses, such as were seen following the global financial crisis. However, he stopped short of calling for a total separation of retail and investment banks. Andrew Tyrie, chairman of the Banking Commission, said that the electrification of the ring fence should include the regulator being able to force the full separation of a bank's retail and investment divisions, if the lender was found to be trying to break the fence. "The proposals as they stand [in the Bill], fall well short of what is required," he said. Over time, the ring-fence will be tested and challenged by the banks. Politicians too could succumb to lobbying from banks and others, adding to pressure to put holes in the ring-fence. He added: "For the ring-fence to succeed, banks need to be discouraged from gaming the rules. All history tells us they will do this unless incentivised not to. That is why we recommend electrification. The legislation needs to set out a reserve power for separation - the regulator needs to know he can use it. Consensus commitment The Commission's report comes a month after Mr Osborne urged its members not to send the government's proposed reform "back to square one" by "unpicking" the consensus on how it should be carried out. A Treasury spokesman said on Thursday evening: "The government is committed to reforming the financial sector and putting in place a regulatory structure that learns the lessons of the past and protects taxpayers in the future." It has been committed to building consensus and has consulted widely on these reforms over the last two and half years. The Banking Reform Bill is the next step in that. The government is grateful to the Parliamentary Commission on Banking Standards for its scrutiny of the draft bill and notes that it, 'welcomes the government's action to bring forward legislation to implement a ring-fence'. The spokesman added that the government would study the report and respond in detail when the Financial Services (Banking Reform) Bill is formally introduced to Parliament early next year.