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* Banks must submit proposals to regulator on Tuesday
* Rules to shield ordinary customers from riskier activities
* Regulator has said it has powers to waive rules for some
* Barclays, HSBC to set up separate units for IT services
By Matt Scuffham
LONDON, Jan 6 (Reuters) - Lloyds Banking Group wants Britain's financial regulator to grant it a waiver fromnew rules requiring banks to have separate boards of directorsfor their retail and investment operations, sources said.
The Bank of England (BOE) is forcing banks to establish aboundary around their branch activities to protect taxpayersfrom any future exposure to the multibillion-pound bailoutsrequired to rescue lenders during the 2007-09 financial crisis.
Among the requirements will be new boards for the supposedlysafer, ring-fenced entities, new staff contracts and separatepension schemes. Banks will also need to separate theirrisk-management and IT operations.
By dividing up a bank's activities, it would make it easierto wind up troubled sections without the risk of dragging downthe healthy parts of the business.
The Financial Times reported late on Monday that Lloyds wasseeking an exemption from the board requirement, arguing thatbecause more than 90 percent of its operations will sit insideof the ring-fence there is no need for a separate board.
The BOE's Prudential Regulation Authority has said it willtake a "proportionate approach" to how the rules are applied.
"The PRA will consider applications from firms formodifications of rules," the regulator said in a consultationpaper published in October.
In the consultation paper, the regulator said it had a"discretionary power to waive or modify rules...where theapplication of rules would be unduly burdensome or would notachieve the purposes for which the rules were made".
Any bank with 25 billion pounds of UK deposits will need toset up a ring-fenced unit by 2019. At present, six lenders wouldbe affected -- HSBC, Lloyds, Barclays, RoyalBank of Scotland, Santander UK and theCo-operative Bank.
Andrew Tyrie, head of an influential parliamentary committeethat scrutinises Britain's finance ministry, has warned thatbanks could look to find ways around the ring-fence and shouldface the threat of being broken up if they do.
Britain's biggest customer-facing banks -- Lloyds and RBS --hope to include as much as possible within the ring-fencedentity, whereas those with more risky investment activities,such as Barclays and HSBC, want fewer of their assets to be keptwithin the ring-fence, industry sources have said.
Barclays plans to keep its Barclaycard credit card divisionoutside of the ringfence, the sources said. Barclays and HSBCare also expected to set up separate subsidiaries for their IToperations and other functions.
Banks must submit their plans to the PRA by the end ofTuesday.
(Additional reporting by Huw Jones and Steve Slater; editing byKeith Weir)
