UK's Labour pledges to force branch selloffs at big British banks

* Labour leader promises to cap banks' market share

* Miliband seeking boost to 2015 election campaign

* Government and industry criticise Labour plan

By William James

LONDON, Jan 16 (Reuters) - Britain's banks will have toshrink and sell off branches in order to improve competition ifLabour wins the next election, party leader Ed Miliband willannounce on Friday in a speech spelling out his agenda forfinancial reform.

Miliband will pledge to break up the financial sector byimposing a cap on the market share of personal banking and smallbusiness lending that any single institution can have.

"To really change our banking system, we have to get to theroot of the decades-long problem in British banking: too muchpower concentrated in too few hands," Miliband will sayaccording to extracts of his speech released in advance.

"We are not asking whether existing banks might have todivest themselves of significant number of branches. We areasking how we make that happen."

Leading in the opinion polls ahead of a May 2015 election,Miliband is looking to find fresh momentum for his party'scampaign which has so far centred on blaming theConservative-led government for falling living standards.

He will argue that improving banking sector competition willhelp small businesses to grow, creating higher-paying jobs andraising living standards.

Details of the plan leaked earlier this week drew a criticalresponse from both the government and the chairman of Royal Bankof Scotland - one of Britain's biggest banks which islikely to find itself in Miliband's sights.

RBS chairman Philip Hampton said any forced branch selloffwould be "incredibly expensive". Mark Carney, the governor ofthe Bank of England said that breaking up a bank did not alwayscreate more competition.

The details of the market share cap will be determined by acompetition watchdog review. That could see the first branchessold off within a year if Labour win power and full divestmentcompleted by 2020.

The government criticised the concept of a market share capand highlighted its own policies designed to encourage greatercompetition in the sector. It argued that Labour could not betrusted to reform the banks, having overseen a period ofderegulation that exacerbated the financial crisis of 2008.

ANTI-BANKER SENTIMENT

A surprisingly strong economic recovery, jobs growth andbelow-forecast inflation have blunted Labour's criticism ofPrime Minister David Cameron's Conservatives, who remain moretrusted to manage the economy according to opinion polls.

Taking further heat out of Miliband's "cost of living"criticism, Conservative finance minister George Osborneannounced his backing late on Thursday for an above-inflationincrease in the minimum wage. '

The limit on market share forms the main plank of a speechdesigned to reinvigorate Labour's campaign by extractingpolitical capital out of Britons' mistrust of bankers. Itfollows a call earlier this week by Labour for the government tostep in and curb bonuses at the largely state-owned RBS.

Miliband will draw parallels between his promise of actionagainst the banks and his pledge made in September last year tofreeze prices at Britain's big-six energy firms.

"Today, I want to talk about another broken market:Britain's banking system," he will say. "There can be no biggertest of whether we are serious about building a new economy andtackling the cost-of-living crisis than reforming Britain'sbanks."

The pledge to freeze energy prices wiped billions off theshares prices of the industry's biggest firms and set thepolitical agenda for the following months, despite attempts byCameron to dismiss the idea as a gimmick.