Aggressive recommendations for the prudential regulation of British banks have been put forward and are likely to influence the Australian debate on banking capital, competition and account-switching. The UK's Independent Commission on Banking has published its interim report in which it makes strong recommendations. The commission has been charged with devising reforms to the UK banking sector to promote financial stability and competition. As expected, it recommends large banks "ring-fence" their retail banks from their investment banks while avoiding recommending full separation of ownership. (This recommendation would not transfer naturally to Australia, where the investment banking arms of the major banks are relatively small.) More relevant to Australia is the commission's argument that Britain should dramatically raise minimum capital requirements on the banks owned by groups such as Barclays and HSBC. Minimum core Tier One capital for these banks (and their ring-fenced retail arms) should be ten per cent of assets, it says, not the seven per cent required by Basel III. These suggested higher UK capital requirements could help create a debate about tougher requirements in Australia, where major banks already just about meet the seven per cent Basel III minimum. The commission is also concerned at the reduction in competition resulting from Lloyds Banking Group's acquisition of HBOS, which was approved by regulators at the peak of the financial crisis in September 2008. In the least anticipated major finding, the commissioners say Lloyds should be forced to sell more of the assets it bought in 2008. This would be more efficient than reversing the merger, it says. "It is important that competition in the sector is the subject of more active regulatory monitoring and improvement," the report says. This stance may bolster the position of those who want tougher pro-competitive rules applied to Australia's Big Four. The report suggests ranking the claims of small depositors above those of other bank creditors in a bank winding-up - a measure also likely to be adopted in some form in Australia later this year. On creating full account number portability, the report says this could be more costly and complicated than a "radically improved system for switching accounts", which "could and should be introduced at a reasonable cost within a short timescale". In Australia, former RBA governor Bernie Fraser, who is inquiring into account portability right now, will read this section of the report with great interest. The commission finds that government could quickly improve switching between banks by means of two simple steps: by providing a set time-period for banks to switch accounts - seven days, say - and by making the current system quicker and more effective. A more fundamental improvement would involve creating "a redirection system to transfer debits and credits from the old (closed) account automatically to the new account without inconveniencing the customer". This could take a year or two to build, the report says. It says such a redirection system could make the system