Customers will have the right to switch their bank account to a rival firm within a week under sweeping plans to reform the industry to be announced by George Osborne today.
The Chancellor is also expected to outline new measures to speed up the transfer of funds between accounts held at different banks which can currently take up to several days.
At the same time he will introduce new legislation which, for the first time, will force banks to split up their investment arms from their retail operations.
The move is designed to prevent banks "gambling" with deposit money and allow banks' investment arms to go bankrupt without threatening savers. Any bank which fails to comply with the new rules could be forced by the Bank of England to sell off its investment or retail operations – the so -called "electric ring fence".
The measures are due to be announced by Mr Osborne at a speech to bank workers in Dorset in which he will claim that 2013 will be the year when Britain "resets our banking system" following the 2008 crash.
But the move will put the Chancellor on a collision course with the banks, which claim the legislation will damage London's attractiveness as a global financial centre. Anthony Browne, chief executive of the British Bankers' Association, said: "This will create uncertainty for investors, making it more difficult for banks to raise capital, which will ultimately mean that banks will have less money to lend to businesses."
He said moving away from the universal model of banking undermined banks' ability to provide all the services businesses need.
He added: "Above all, what banks and business need is regulatory certainty so that banks can get on with what they want to do, which is help the economy grow."
The Chancellor is said to be keen to ensure that the plans will directly benefit customers who have lost faith in the industry following a string of mis-selling scandals.
Government sources said it was "inexplicable" that in countries such as South Africa it was possible to transfer large amounts of money between accounts within 24 hours while in the UK it could take up to three days unless customers were prepared to pay.
They added that the announcement on account swapping would mean that by September the amount of time it takes to move accounts would be halved from 10 working days to five.
"Let's take the anger we feel about the banks and turn it into change to build the banking system that works for us all," Mr Osborne is expected to say.
"We're going to start, with the industry, changing the whole culture and ethics of the business, so they work for you. We're going to give customers the most powerful weapon of all: choice."
The decision to "electrify" the ring fence between customer banks accounts and investment banking is a surprise as Mr Osborne and other senior ministers had previously appeared hostile to the move.
However the Chancellor is thought to have concluded that the proposal, put forward by the Chairman of the Banking Commission, Andrew Tyrie, was necessary to reassure the public the new rules have "teeth" and couldn't be manipulated by the banks in the future.
Mr Osborne will also take a swipe at the Labour leader, Ed Miliband, suggesting that his anti-bank rhetoric is damaging a vital British national interest. "Any bunch of politicians can bash the banks, chase the headlines, court the populist streak," Mr Osborne is expected to say.
"But what good would that do our country? The jobs, the investment, the banking system we all need would go with it. Let's take the anger we feel about the banks and turn it into change to build the banking system that works for us all."
Labour's Shadow Treasury Minister, Chris Leslie, said the Chancellor was being dragged towards a partial climbdown.
"We must see fundamental cultural change in our banks," he said. "If this does not happen then banks will need to be split up completely, as we made clear in the autumn."Reuse content