* Investor confidence undermined if change takes too long
* Bank slammed for compliance failings, aiding tax avoidance
* 89 percent of shareholders back 2012 pay plan
* Shares dip 2.1 pct
By Steve Slater and Matt Scuffham
LONDON, May 24 (Reuters) - HSBC called on regulators to speed up industry reform as its shareholders urged Europe's biggest bank to take a lead in cutting pay and criticised it for compliance failings and aiding tax avoidance.
HSBC Chairman Douglas Flint told around 400 shareholders at the bank's annual meeting that the fallout from recent scandals had created a "once-in-a-generation" opportunity to reform banking and the broader financial industry.
"As a first priority we need to speed up the reform process. Otherwise investor confidence in the sector will continue to be undermined," he said.
Investors approved its 2012 pay plan, with 11 percent of shareholders voting against it, compared with 10 percent at last year's meeting. Including abstentions, 14.7 percent of shareholders this year failed to back the plan.
"I'd like to see an immediate end to any increase in pay and a reduction in bonuses, which are totally disproportionate to what is delivered," said private shareholder David Haslam.
He said it was an industry problem, rather than specific to HSBC, but added HSBC should lead the way in pay reform.
CEO Stuart Gulliver was paid 7.4 million pounds last year, down from 8 million for 2011. The bank paid 204 employees more than 1 million pounds last year, including 78 in Britain.
"HUMBLED AND HORRIFIED"
Flint apologised to shareholders for the bank's failings after it was handed fines of $1.9 billion in December, the largest ever imposed on a bank, following a U.S. investigation into its Mexican and U.S. operations.
The probe made scathing criticism of HSBC's anti-money-laundering systems and found its lax controls allowed two drug cartels to move $881 million through the bank.
"We were humbled and horrified to discover findings of such magnitude," said Flint.
The settlement included a deferred prosecution agreement (DPA), meaning the bank's operations would be monitored but it remains exempt from prosecution unless it transgresses again.
The Guardian newspaper on Friday reported a row between the U.S. Justice Department and the judge overseeing the case. It said Judge John Gleeson was believed to be considering rejecting the deal, which could leave HSBC facing a criminal prosecution.
Flint said the bank was doing all that had been asked of it by U.S. authorities and was not involved in any discussion between the judge and regulators. "We have done everything we said we were going to do," he said.
HSBC shares closed down 2.1 percent, underperforming a 1.1 percent fall in Europe's banking index.
"There is increased concern in the U.S. about DPAs, but the authority and role of the judges is unclear," analysts at Credit Suisse said.
Several shareholders slammed HSBC for its mistakes in Mexico and accused it of aiding tax avoidance by customers in countries including Switzerland and Jersey.
Flint said the bank was reviewing its operations in so-called tax havens and expected a significant reduction in the amount of business it does in those jurisdictions, though he said legitimate business was done there.
"We are co-operating with tax authorities as they seek out if there is tax unpaid by individuals," Flint said. "We will make ourselves as bulletproof as we can in this area."
Campaigners, led by non-government organisation Global Witness and fronted at the AGM by television personality Bill Oddie, also criticised the bank for funding logging and palm oil companies, threatening rainforests in Borneo.
Gulliver said HSBC would audit its activities and asked Oddie to work with the bank to address deforestation and influence policies across major companies.
Gulliver is restructuring HSBC and this month unveiled plans to intensify his cost-cutting efforts to save up to $3 billion in annual costs by 2016, on top of $4 billion he has already cut since taking over in 2011.
In the face of weak demand in Europe, HSBC plans to increase revenue by focusing on high-return markets in Asia, where it now generates around two-thirds of its profit.