LONDON (Reuters) - Senior bankers in Britain could face a jail term of up to seven years if their bank fails and they are subsequently found guilty of "reckless misconduct", draft laws published on Tuesday said.
The sentence was included in a wide-ranging set of proposed amendments to the Banking Reform Bill which the coalition government is seeking to enact in the wake of the financial crisis.
A cross-party panel of lawmakers had recommended introducing the charge of "reckless misconduct in the management of a bank" earlier this year as one of many proposals aimed at cleaning up Britain's banking culture and improve the standards of corporate governance.
"During the financial crisis and in recent years, the reputation of the City of London took a real knock," Financial Secretary to the Treasury Greg Clark told activists at the ruling Conservative party's annual conference in Manchester.
"I think it is particularly important for a City of London whose reputation throughout centuries has been based on integrity, on trust, on probity that we should move further and faster than others to restore it."
The government said in July it would back most of the panel's recommendations and on Tuesday laid out the 86 changes it wants to make to the current draft bill to implement them. If approved, these could become law early next year.
Britain wants to avoid a repeat of the 2008 financial crisis when 65 billion pounds of taxpayers' money was needed to bail out Royal Bank of Scotland and Lloyds Banking Group.
The government said the new laws would enhance competition among British banks, impose higher standards of conduct and ensure that taxpayers will no longer have to pay out for future bank failures.
"Today's amendments mark the final part of the government's plan for the biggest ever overhaul of the UK banking system," a finance ministry spokesman said.
Led by Conservative lawmaker Andrew Tyrie, the Parliamentary Commission on Banking Standards produced its final 500-page report in June. Chancellor George Osborne said the government accepted its main recommendations, although he did not agree with some proposals.
Unusually, and to the annoyance of Tyrie and opposition lawmakers, the bill is undergoing significant changes in the un-elected upper house of the British parliament because the government wanted to avoid lengthy delays in the lower house.
The new 'reckless banker' offence would apply to those listed on a newly-established register of senior bankers if they make decisions which lead to the failure of a bank, or fail to stop other making such decisions.
"The maximum sentence for the new offence is seven years in prison and/or an unlimited fine," a briefing note by the finance ministry said.
"The new offence will strengthen individual accountability for senior bankers, and act as a deterrent against misconduct."
The government also said it would accelerate the process of splitting up any bank which tries to circumvent new rules designed to ring-fence their retail operations from riskier investment banking activities.
Fearing that banks might try to circumvent those rules, earlier this year the Parliamentary Commission on Banking Standards (PCBS) recommended a backstop power that could force full separation if a bank didn't stick to the spirit of the legislation.
"Banks will game the rules unless discouraged from doing so," said Tyrie. "The revised amendments enable the regulator to split a bank which tries. That creates a strong deterrent against gaming the ring fence."
The government has also adopted the commission's proposal that the Prudential Regulation Authority (PRA), one of Britain's new financial supervisors, be asked to promote competition within the industry.
It is keen to break the dominance of the country's biggest four lenders - Lloyds Banking Group, Royal Bank of Scotland, Barclays and HSBC - which control around three quarters of UK retail accounts.
The requirement will be secondary the PRA's main objective of ensuring the financial safety of the firms it regulates.
It will also bring forward plans to reform regulation of bank's payments systems in order to make it easier for new challengers to enter the industry.
Additional reporting by Guy Faulconbridge in Manchester; Editing by Greg Mahlich