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By Matt Scuffham
LONDON (Reuters) - Britain should introduce laws making it possible to jail "reckless" bankers and claw back past bonus and pension awards, an influential panel of lawmakers said on Wednesday.
The Parliamentary Commission on Banking Standards, set up by the government last year after Barclays <BARC.L> was fined over the manipulation of global interest rate benchmarks, said deep lapses in standards had been commonplace and recent scandals had exposed "shocking and widespread malpractice".
"Taxpayers and customers have lost out. The economy has suffered. The reputation of the financial sector has been gravely damaged. Trust in banking has fallen to a new low," the commission's chairman Andrew Tyrie said in a 500-page report.
The cross-party group, which includes former British finance minister Nigel Lawson and Justin Welby, head of the Anglican church, recommended senior bankers are held personally responsible and regulators granted greater powers.
The commission is recommending a new criminal offence of "reckless misconduct in the management of a bank" which would carry a jail sentence for the most serious cases.
"Senior bankers who seriously damage their banks or put taxpayers' money at risk can expect to be fined, banned from the industry, or, in the worst cases, go to jail," said Tyrie.
The commission recommended the industry's 'approved persons' regime be scrapped and replaced with two new registers - one for senior bankers and one for other bank employees. It said the new system would ensure the most important responsibilities within banks were assigned to specific individuals.
The 'Senior Persons Regime' would enable those responsible for failures to be identified more easily and provide a stronger basis for action to be taken against them, the report said.
On pay, the commission recommended that the industry adopt a new remuneration code to better balance risk and reward with more pay deferred over longer periods of time.
The regulator would be granted a new power enabling it to cancel all bonuses and pension rights not yet paid out to senior executives in the event of their banks needing taxpayer support.
There was a political outcry when Fred Goodwin, the former chief executive of Royal Bank of Scotland <RBS.L> left the bank after it was rescued by the government with a 703,000-pound annual pension, worth almost 17 million pounds. He later agreed to take a 2.7 million-pound lump sum and 342,500 pounds a year.
Britain's finance ministry welcomed the recommendations and said it would make a formal response in the next month.
"Where legislation is needed we have said we will support it and the banking bill currently before parliament can be amended to ensure they are quickly enacted," it said.
The Financial Conduct Authority, the new financial services industry regulator, said it was "learning from the regulatory mistakes of the past", having taken over the regulation of UK banks in April.
The commission also urged the government to immediately consider a range of strategies for what it should do with Royal Bank of Scotland (RBS), which has been 81 percent state-owned since its bail-out in 2008, including a possible break-up.
Some commission members, including Lawson, have advocated hiving off RBS's toxic loans into a 'bad bank' leaving the remaining 'good bank' better able to lend to British businesses and households. But Finance Minister George Osborne said such a move would be complicated, time consuming and costly.
The report said the government had interfered in the running of RBS and Lloyds Banking Group <LLOY.L>, in which it holds a 39 percent stake, and said RBS was being held back by having the government as its main shareholder.
The level of the government's influence over RBS has come under scrutiny since Chief Executive Stephen Hester was ousted last week with the Treasury's approval.
Osborne is set to lay out strategies for returning RBS and Lloyds Banking Group <LLOY.L> to full private ownership in his annual speech to financiers in the City of London on Wednesday.
Labour's finance spokesman Ed Balls said Osborne must resist the temptation for a "loss-making firesale" of RBS at the current share price, which would add billions of pounds to Britain's national debt.
Commission member Pat McFadden told Reuters the commission did "push its remit" in considering the future of RBS. There has been media speculation that the issue caused friction among commission members, with some objecting to recommendations being made on an issue which it had taken little evidence on.
"We've come out in the end in a sensible position of saying that before we recommend a sharp change from the current strategy being pursued at the bank, we need to do the work," he told Reuters. The commission has asked the Treasury to produce a cost-benefit analysis for breaking up the bank by September.
(Additional reporting by Steve Slater and William James; Editing by Greg Mahlich)