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* UK banks must "ring-fence" units to protect savers,taxpayers
* HSBC, Lloyds, RBS plan "broad" ring-fence, Barclaysdiffers
* Potential for change as rules are finalised
* Structure crucial for how banks deal with corporatecustomers
By Steve Slater and Matt Scuffham
LONDON, July 3 (Reuters) - Barclays is planning toset up a smaller separate UK bank than rivals as British lendersfinalise how to restructure to meet new rules designed to givegreater protection to savers and taxpayers.
Britain's big lenders must set up so-called 'ring-fencedbanks' by 2019. The new businesses must include UK retailbanking and small business customers and most simple activities.Big global corporate customers and most investment bankingproducts have to sit outside in a separate entity.
Banks are left to choose whether to place many othercustomers and activities inside or outside the ring-fencedbusiness -- areas such as mid-sized businesses, wealthmanagement activities or simple derivatives products.
Unless it makes a U-turn, Barclays will adopt a differentstructure to its main rivals.
Barclays looks set to choose a "narrow" ring-fenced bank,which means it will put as few customers and activities insidethe new unit as possible, industry sources said.
The sources said Barclays had long intended to follow thatmodel, and one said the decision was rubber-stamped at a meetingof top management last week. Barclays declined to comment.
The decision is crucial for how banks will look in thefuture and how they deal with customers. Setting up thering-fenced operations is also expected to cost the industry atleast 5 billion pounds ($7.8 billion) and be long and complex.
David Parker, head of UK banking at consultancy Accenture,said the restructuring is difficult and costly at a time banksare "trying to reinvent" themselves for the digital era and tomove on from past conduct issues.
"There's no doubt that when you overlay the effort requiredfor ringfencing it's problematic and it's forcing institutionsto make very, very hard choices about whether to sacrificelaunching new products or new services," Parker said.
STILL CHANGING
Under the new rules at least six British banks must set upthe firewalls, which lawmakers expect to shield savers fromproblems in riskier areas of banking and try to avoid a repeatof the 2007-09 financial crisis when taxpayers had to bail outRoyal Bank of Scotland and Lloyds.
HSBC, which had previously considered a narrowring-fenced bank, has now opted to set up a broad structure.Lloyds and RBS have always planned to include the majority oftheir customers, staff and businesses in the ring-fenced bank,reflecting their core focus on domestic banking.
Final rules will not be laid out until early next year andhow they are set for capital, liquidity, dividends and derivatives could still force banks to rethink plans.
Banks have submitted preliminary plans, but PrudentialRegulation Authority boss Andrew Bailey told Reuters in May bigchanges were still be made, partly because banks are alreadyshrinking and reshaping investment banking.
Barclays appears to have the biggest challenge, industrysources said, and it has appointed former Bank of America executive Jonathan Moulds to oversee the process.
Banks are likely to make decisions based on where they seemost collaboration and cross-selling opportunities.
Making the ring-fenced bank as big as possible enables themto offer personal current accounts, business banking and wealthmanagement to an entrepreneur, for example. A smallerring-fenced bank could mean it's easier to sell complexinvestment banking products to corporates.
Customers most affected will be corporate clients which fallbetween small and global companies. For example, a large butmainly domestic retailer like supermarket William Morrison could end up inside or outside the ring-fence.
Banks may choose to use two different brands. HSBC has saidit will rebrand its ring-fenced bank, so customers are awarethat they are dealing with two different operations.
Other big challenges include setting up independent boards,new contracts for customers and staff and considerabletechnology upheaval.
Banks are aiming to have their ring-fencing structures upand running from the start of 2018, a year ahead of deadline.
HSBC has said its ring-fenced bank will be based inBirmingham, 125 miles (200 km) from its London groupheadquarters, in a new building for 2,500 staff. It will includeprivate banking and account for two-thirds of its UK revenue andhave about 26,000 staff.
A further 14,000 staff will be in functions such as humanresources, technology and communications shared by both thering-fenced bank and the non-ring-fenced unit.
Lloyds says 97 percent of its assets will sit inside itsring-fenced bank and RBS, which is in the process of drasticallyshrinking its international operations, has said 80 percent willbe within the unit, including its Coutts private bank.
HSBC said this week it will cost about 1.5 billion pounds toset up its new unit. Lloyds said the cost of setting up thering-fenced entity would be in the "hundreds of millions" ofpounds with ongoing annual costs in the "tens of millions".($1 = 0.6406 pounds) (Editing by Keith Weir)
