UK Government proposals which aimed to spare Royal Bank of Scotland (RBS) from being forced to sell off its Williams and Glyn (W&G) arm are being investigated by the European Commission.

When the bank was bailed out to the tune of £45.5 billion by the government at the height of the financial crisis, the EU rubber-stamped a restructuring plan under which RBS was required to sell off W&G by the end of this year to remedy competition concerns.

However, the lender has struggled to offload the 300-branch network, and in February the Treasury and RBS proposed scrapping the sale in favour of an alternative £750 million plan to boost competition in the banking market in an attempt to appease officials in Brussels.

European competition commissioner Margrethe Vestager yesterday announced an in-depth probe of the proposals.

“RBS is the leading bank in the UK SME banking market and received significant state support during the financial crisis,” she said.

“The Commission is now seeking the views of all interested parties on an alternative package proposed by the UK to replace RBS’s commitment to divest Williams and Glyn.

“We can only accept this proposal if it has the same positive effect on competition as the divestment of Williams and Glyn would have had. This is important for fair competition.”

The antitrust watchdog added that it will “carefully review” the responses to its call for evidence before taking a final decision on whether or not to accept the alternative plan.

For its part, the Treasury is to begin a market testing exercise to ensure that the new package does actually increase competition. A spokesman said: “This is an important step forward in the process of resolving one of RBS’s most significant legacy issues.

“We look forward to working with relevant parties to ensure the proposed plan delivers increased competition in the UK’s business banking market as effectively as possible.”

Chancellor Philip Hammond has already said the Government does not expect to offload its 72 per cent stake in RBS until after 2020.

RBS have not commented on the competition commissioner’s remarks, but in a statement in February, when the plan was announced, its CEO Ross McEwan said it would be good for competition among small to medium sized enterprises (SMEs).

“Today’s proposal would provide a path to increased competition in the SME market place,” said McEwan. “If agreed it would deliver an outcome on our EC State Aid divestment obligations more quickly and with more certainty than undertaking a difficult and complex sale and would provide much needed certainty for customers and staff.”

Under the government’s plan the new fund would be independently administered, and “dowries” would be paid to SMEs switching to challenger banks - relatively small retail banks set up to compete with large and long-established institutions.

RBS will also have to give the challenger banks’ business customers access to its branch network, as well as funding a new fintech investment fund.

The sale of W&G has been fraught with the incompatibility of the two organisations’ IT systems cited as the biggest woe. Spanish bank Santander had expressed early interest in W&G but pulled out because of the IT issues and a failure to agree a price.