The Parliamentary Commission on Banking Standards has said that bosses of failed banks should face jail or lose the right to claim bonuses for up to ten years for ‘reckless misconduct’.

The new criminal offence would make sure that top executives paid for their ‘shocking and widespread malpractice’, according to a report by the commission which makes a number of recommendations on banking standards to the government.

Not a single British banker has been sent to prison since the financial crash began in 2007, but the proposed legislation seeks tougher disciplinary measures against errant bankers.

As well as prison terms, bankers could face heavy fines and bans from the financial services industry, as well as curbs on bonuses and the threat of pensions being cancelled.

Commission chairman Andrew Tyrie MP said:

… Under our recommendations, 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. That has not been the case up to now.

In its 527-page report, the commission found that ‘deep lapses in standards have been commonplace’. Mr Tyrie highlights that it is not just bankers that need to change. The actions of regulators and governments have contributed to the decline in standards, too, he says.

The commission of MPs and peers calls for a sweeping overhaul of top pay, with city regulators given new powers to cancel pension rights and payoffs for the bosses of bailed-out banks.

It also wants watchdogs to be able to force banks to defer bonus payments for up to a decade, in order to prevent bosses reaping large rewards for risky, short-term strategies that subsequently lead to losses.

According to Mr Tyrie the rewards for fleeting, often illusory success have been huge, while the penalties for failure have been much smaller, or non-existent.

However, the director general of the CBI, John Cridland, said:

… There are tough criminal sanctions in the UK for those who engage in fraudulent behaviour. Enforcing those must come before the introduction of new sanctions.

The findings of the parliamentary commission, set up last summer in the wake of the LIBOR scandal, are not binding, but the Government is being urged to implement its recommendations ‘in full’. The proposals have been handed to ministers.

The reforms will aim to prevent a repeat of the bailouts and scandals such as the LIBOR rate-rigging, where some bankers have walked away with large payoffs and pensions.

But bankers will not be targeted retrospectively. The disgraced banker, Fred Goodwin, who left the Royal Bank of Scotland in ruins but is still receiving a pension of £342,000 a year for life, will be unaffected.

Nor will any legislation ensnare former HBOS chief James Crosby, who will collect £406,000 of his £580,000-a-year retirement deal.

Under current rules, senior bankers have been able to evade punishment by claiming they were not responsible for collapses and that they had not committed deliberate fraud, with the onus on financial authorities to prove wrongdoing.

In the proposed regime, though, senior managers could be held individually accountable and would have to show they took ‘all reasonable steps’ to avoid a failure.

Mr Tyrie said that a lack of personal responsibility has been commonplace throughout the industry, and added:

… Senior figures have continued to shelter behind an accountability firewall.

The commission also wants a new licensing system to stop traders involved in setting LIBOR rates and prevent area managers who oversee the sale of financial products from slipping through the net.

The report also recommends that City watchdogs should be able to force badly-behaved banks to sign a formal agreement to improve their culture and standards.

The commission – whose members include the Archbishop of Canterbury Justin Welby and former Chancellor Lord Lawson – also demands the dismantling of UK Financial Investments (UKFI), the body that is supposed to manage taxpayers’ holdings in RBS and Lloyds at arms’ length from ministers.

It said the Government, which denies forcing the recent resignation of RBS boss Stephen Hester, has interfered in the running of the two banks and that UKFI is seen as a ‘fig leaf’ for ‘the reality of direct government control’.

Ministers must also make an immediate commitment to analyse whether RBS should be split up into a ‘good bank’, that could lend more to small firms and personal customers, and a ‘bad bank’ to dump its toxic assets, the commission said.

A study of high street lenders by competition watchdogs and an independent panel of experts to look at measures to help bank customers were also part of the recommendations.

Lord Oakeshott, a former LibDem Treasury spokesman, said:

… We must stop the subterfuge of UKFI and put the Treasury on the spot to make the banks we own, lend. RBS, our biggest business bank, has failed the nation that rescued it at £1,500 for every taxpayer. It must be broken up with new management and tough net lending targets for the good bank so small business can grow again.