LLOYDS Banking Group and Royal Bank of Scotland could be carved up under a Conservative government, shadow chancellor George Osborne signalled yesterday.<br /><br />Speaking as he set out his vision of the future of financial regulation, Osborne said the Tories would task the Office of Fair Trading (OFT) and the Competition Commission with probing whether consolidation in the sector had damaged competition.<br /><br />The Treasury, which is the largest shareholder in both banks, could use its sizeable holdings to apply pressure on the lenders to dispose of units, should the inquiry find that the lenders have become too large.<br /><br />&ldquo;As it comes to the point...when a government needs to think about selling shares that the taxpayer owns in our largest banks, I think we need to have a strategic view of the kind of banking system we want at the end of that process,&rdquo; said Osborne.<br /><br />A Tory insider said the focus would be on selling off chunks of the banks to new players in the market, to reverse the consolidation seen when Lloyds took over HBOS last year.<br /><br />An inquiry would represent a significantly watered down version of earlier Conservative rhetoric, which had suggested that a Tory government would forcibly break up Lloyds. In a further, more dramatic u-turn, the shadow chancellor rejected calls to forcibly separate investment banks from retail banks, though he maintained that the idea might make sense if it were implemented globally.<br /><br />The plans form part of an overhaul of the financial system that would do away with the FSA and hand responsibility for prudential regulation back to the Bank of England, as revealed in City A.M. yesterday.<br /><br />A new Financial Policy Committee, housed within the Bank, would be charged with monitoring systemic risk, while the FSA would be replaced with a Consumer Protection Agency aimed at looking after customers.<br /><br />Like chancellor Alistair Darling, Osborne wants to see higher capital requirements on risky institutions and to curb remuneration policies geared towards short-term profit. City minister Lord Myners yesterday hit back at the plan, most of which he said had been stolen from Labour&rsquo;s own white paper.<br /><br />&ldquo;This is rather disappointing and shows a na&iuml;ve approach &ndash; a lack of original thinking,&rdquo; he said. &ldquo;It&rsquo;s no surprise given his Osborne&rsquo;s relative lack of business knowledge.&rdquo;