TWO of the UK's top regulators have warned of the lobbying power of Britain's top banks as legislators consider a revamp of finance sector rules.

Andrew Bailey, director of the Financial Services Authority's banks and building societies arm, suggested regulators be given power to force banks to completely separate their retail and investment banking arms if they attempt to get around plans for more moderate ring-fencing.

Mr Bailey said the financial services industry "habitually" attempted to subvert regulation. "There are clearly going to have to be deterrent powers in place to prevent that," he said.

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Under Government plans, retail banking activities would be ring-fenced from riskier investment banking operations in an effort to protect taxpayers from another banking bailout.

Mr Bailey said the threat of targeting individual institutions or the industry for more rigid separation might prevent attempts to "tunnel under" the fence.

But he warned that such a power should be protected from the lobbying powers of financial institutions. He told the Parliamentary Com-mission on Banking Standards: "There is very powerful lobbying out there."

Asked how powerful the banking lobby is, Mr Bailey said: "I do not think it is probably as influential as it was in the years before the outbreak of the crisis in 2007." But he added: "There are signs of it recurring."

In 2013, Mr Bailey will become the deputy chief executive of the new Prudential Regulation Authority.

FSA chairman Lord Adair Turner said bank lobbying had focused on politicians. "We are talking about the way they can get things in legislation we would not necessarily want them to get," he said.

Lord Turner, who is in the running to become the next Governor of the Bank of England, said only limited use of derivatives should be allowed in the ring-fenced part of a bank.

He said the culture of classic banking at Royal Bank of Scotland had been "contaminated" by investment banking. But at HBOS, he said, the problem was a view that "banking products are there to be sold like any consumer goods products".