LONDON, Nov 16 (Reuters) - UK regulators must not give in to "special pleading" from the biggest banks and should go ahead and split them up if a reform aimed at protecting their deposit-taking retail arms from their riskier businesses is circumvented, a senior UK lawmaker said on Monday.
Andrew Tyrie, chairman of parliament's treasury committee, said banks must get on with implementing the Vickers reform which requires banks HSBC Barclays, Lloyds and RBS to ring-fence the capital of their retail banks by 2019.
The aim is to make sure taxpayers won't be needed again to rescue banks in trouble, and regulators have the power to "electrify" the fence, meaning the lender has to fully separate out its retail arm.
"If they conclude that a bank is 'gaming' the ring-fence, parliament will expect them to say so and threaten or use its powers to separate banks," Tyrie said in a speech at Allen & Overy lawfirm.
Regulators must decide by 2021 if the ring-fencing reform is working as intended.
"That review could recommend full separation of all banks. Banks need to be reminded that a review is coming," Tyrie said.
His blunt message contrasts with the more emollient approach taken towards the banks by the government in recent months.
British finance minister George Osborne, who ousted Martin Wheatley, the hardline chief executive of the Financial Conduct Authority regulator, wants a "new settlement" with banks and for regulators to ensure that London is the most attractive home for international lenders.
"Regulators should not give in to special pleading from banks in implementing the reforms introduced as a result of the financial crisis," Tyrie said.
Memories of the 2007-09 crisis will be rekindled on Thursday when the Bank of England publishes a report on the collapse of HBOS, now part of Lloyds.
Before then, Tyrie's committee will quiz Britain's top banking regulator, Andrew Bailey of the Bank of England's Prudential Regulation Authority, on Tuesday at 1000 GMT.
It was worrying that regulators still don't believe that big banks that fail can be wound up or "resolved" without taxpayer money being needed, Tyrie said.
Implementing ring-fencing would be key to making banks resolvable and keeping taxpayers off the hook, he added.
Some of the banks' criticism of ring-fencing contained "misrepresentations" and the "awkward truth" is that the measure was forcing the boards of banks to "identify in more detail what is really going on in them", Tyrie said. (Editing by Greg Mahlich)