The Government will come under pressure today to rewrite its controversial plans for dealing with ailing British banks as some of the City's most powerful fund managers claim that the new rules would ride roughshod over their rights.

Investors' opposition to plans to create a special resolution regime (SRR) for lenders on the brink of collapse comes after banks and lawyers expressed their hostility. Banks say that the proposals would bump up their cost of capital and law firms say they create huge legal uncertainty.

Fund managers are calling the rules ill-conceived and argue that they would make it possible for the authorities to break up or sell on parts of a stricken bank without having to consult equity or bondholders.

Speaking on the day that the Treasury closes a consultation on the SRR, the Association of British Insurers is demanding a government rethink. According to Peter Montagnon, director of investment affairs at the ABI: “It will affect confidence in the City and the cost of capital will rise. The case for an SRR is not proven and the proposals in their current form need substantial change.”

The idea behind the SRR is to make it easier for the State to nationalise failing lenders or force a sale or break-up involving the private sector. It was prompted by the collapse of Northern Rock, whose woes caused the first run on a high street bank in more than 100 years and threatened to bring about a financial collapse.

The Government also wants to be able to create a bridge bank, or state-backed lender, out of a collapsing firm.

The regime would be set up by the Financial Services Authority, the chief City watchdog, and would be co-ordinated by the Bank of England.

While it acknowledges the need for change, the ABI is concerned that as well as being able to side-step stakeholder interests, the Government would be able to cherry-pick assets and sell them on to a buyer without having to gain approval.

Lawyers have criticised the proposals for creating a legal quagmire. Paul Edmondson, a partner at CMS Cameron McKenna, the law firm, said: “This legislation is of major concern to the banking industry. It threatens to undermine legal certainty for financial institutions and commercial organisations entering into transaction with UK banks.”

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