By Matt Scuffham
LONDON (Reuters) - Bankers who are reckless with customers' or taxpayers' money could face criminal charges and have bonuses and pensions clawed back, according to proposals backed by Britain's prime minister on Wednesday.
Many Britons blame bankers' risk-taking for the 2008 financial crisis and subsequent economic slump and were furious when the former boss of RBS <RBS.L> left the bank with a pension of almost 17 million pounds even after a state rescue.
He later agreed to a cut and was stripped of his knighthood but it was one in a series of banking scandals that increased pressure on Prime Minister David Cameron to get tougher on a sector contributing billions of pounds to the British economy.
The parliamentary commission on banking standards he set up last year after Barclays <BARC.L> was fined for manipulating interest rate benchmarks said on Wednesday the law should be changed so that bankers found guilty of "reckless misconduct in the management of a bank" could face jail.
The UK Treasury said the new rules could be in place before the end of 2015 but lawyers said it would be hard to prove when a banker had taken too much risk or simply made a mistake.
Asked in parliament whether he supported the report's recommendations on criminal penalties and pay, Cameron said: "Penalizing, including criminal penalties ... bankers who behave irresponsibly, I say yes."
Lawyers doubted that new laws would be effective.
"There is likely to be a considerable burden of proof - merely miscalculating or being negligent in an assessment of risk most likely won't be enough," said Michael Isaacs, head of banking litigation at law firm Pinsent Masons.
The commission also recommended a new pay code to better balance risk and reward, with bonuses deferred for up to ten years with the aim of preventing bankers taking risks for short term reward, one of the factors blamed for the crisis.
It also proposed that the UK financial 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.
Banking industry sources said banks were likely to accept many of the proposals in principle, including the threat of criminal sanctions, but will lobby for some to be watered down, including the 10-year deferral on bonuses.
"The commission's conclusions contain many constructive proposals to help fix the issues which have afflicted the industry, most importantly in the emphasis on personal responsibility and accountability," said HSBC <HSBA.L> Chairman Douglas Flint.
The cross-party commission, 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.
Commission member Pat McFadden said it would be "pressing the government very hard in the coming weeks" to make sure the proposals are implemented. The government has set itself a four week deadline to give a formal response.
"I think all of us who were engaged in this process over the last year very much hope this is not a report which is going to gather dust," he told Reuters.
The British Bankers Association, a lobby group, said it would work with government and regulators to take forward proposals from what it described as the "most significant report into banking for a generation".
Bankers are deeply unpopular in Britain where the economy has narrowly avoided a triple-dip recession and is expected to show tepid growth at best through next year.
"I think jail sentences would be suitable," Ben Stewart, a 34-year-old cabinet maker said in Whitechapel, not far from the City of London, the traditional financial heartland.
"It's fraud a lot of what they've done. Even if it's not legally fraud, I think by most people's moral compass, they'd find it quite distasteful."
The commission recommended the industry adopt two new registers for senior bankers and other employees to make sure 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.
The Financial Conduct Authority, the financial services industry watchdog which took over regulation of banks in April, said it was "learning from the regulatory mistakes of the past".
The commission also urged the government to immediately consider a range of strategies for RBS, which is 81 percent state-owned, 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.
(Additional reporting by Steve Slater, William James, Peter Griffiths and Dasha Afanasieva; Editing by Greg Mahlich and Anna Willard)