BRITAIN'S biggest banks will face complete separation if they flout new rules to ring-fence risky operations from savers' deposits, the Chancellor will announce today.

The new legislation will give the Government and a new banking watchdog powers to "electrify the ring-fence" if banks fail to split high street branch operations from the dealing floor.

Launching the Banking Reform Bill today, Chancellor George Osborne will tell traders at JP Morgan in Bournemouth that no bank will be considered "too big to fail".

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The move comes after thousands more private shareholders joined a multibillion-pound legal action against Royal Bank of Scotland and its former directors, claiming they were misled about the financial strength of taxpayer-funded RBS when it launched its £12 billion rights issue in April 2008.

But Mr Osborne will say today: "When the RBS failed, my predecessor Alastair Darling felt he had no option but to bail the entire thing out. Not just RBS on the high street, but the trading positions in Asia, the mortgage books in sub-prime America, the property punts in Dubai.

"I want to make sure the next time a Chancellor faces that decision they have a choice. To keep the bank branches going, the cash machines operating, while letting the investment arm fail.

"Our country has paid a higher price than any other major economy for what went so badly wrong in our banking system. The anger people feel is very real. Let's turn that anger from a force of destruction into a force for change."

However, it has been warned the announcement 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."

The RBS Shareholders Action Group has revealed up to 4000 extra private investors have now joined the law suit, taking the total to some 12,000 compared with 8000 last autumn.

RBS sources said the action group was hopeful the case could open later this month or early spring, and that the claim may now exceed £3.5bn.

The action group alleges shareholders were misled about the financial strength of taxpayer-funded RBS when it launched its £12bn rights issue in April 2008.

It is understood four former senior RBS directors are named in the action: chief executive Fred Goodwin, chairman Sir Tom McKillop, investment banking head Johnny Cameron and finance director Guy Whittaker.

It comes amid speculation that RBS could face criminal charges and a £500 million fine this week for its role in the Libor rate-rigging scandal.

RBS – 81% state owned – is thought to be under pressure from the Government to pay the Libor fine with cash from its bonus pot to ensure taxpayers do not suffer, but reports suggest traders are still set to receive bonuses worth hundreds of millions of pounds for 2012.

Meanwhile, Barclays bank announced last night that finance director Chris Lucas was stepping down. He and general counsel Mark Harding will leave the company once successors have been found, the bank said in a statement. Given the men's seniority, that could take "a considerable time".

Mr Lucas is one of several past and present Barclays staff being investigated over whether the bank broke the rules when it took big cash infusions from Qatar's sovereign wealth fund in 2008.

Barclays has also seen several top executives, including CEO Bob Diamond, leave since the rate-fixing scandal last year.