UPDATE 3-New UK bank standards body gets support from Bank of England's Carney
* BoE governor Carney to oversee chairman appointment
* Carney urges all banks operating in UK to participate
* Lambert expects "good number" of overseas banks to join
* Banks must report on culture, practices each year (Adds industry reaction, further details)
By Matt Scuffham
LONDON, May 19 (Reuters) - Bank of England governor Mark Carney has backed a plan by Britain's biggest banks to set up a new body to improve standards in an industry rocked by a string of scandals.
The Banking Standards Review Council (BSRC), funded by but independent from the banks, is to be set up this year after banks accepted recommendations from Richard Lambert, a former director general of the Confederation of British Industry.
Banks are trying to repair their image tarnished by the 2008 financial crisis and scandals including the rigging of benchmark interest rates, allegations of foreign exchange market rigging and the mis-selling of loan insurance.
"Rebuilding confidence and trust in the banks is especially vital in the UK, because of the size of the banking system and the importance to the economy of London's role as an international capital market," Lambert said on Monday.
Carney urged all banks that operate in Britain, both domestic and foreign, to support the initiative.
"We need a financial system that is safe, fair and acts with integrity. The Bank of England is doing its part to ensure safety and soundness. Integrity, however, cannot be regulated. It must come from within," he said.
The council will work with banks to create a new code of practice for the industry. But Britain's financial regulator will retain responsible for disciplining banks for wrongdoing.
Britain's biggest six banks - Barclays, HSBC , Lloyds Banking Group, Royal Bank of Scotland , Santander UK and Standard Chartered - and its largest customer-owned bank, Nationwide, asked Lambert to come up with proposals for the body last year.
The Parliamentary Commission on Banking Standards, a group looking into ways to reform banks, supported the creation of a professional standards body in its final report last year but said it could take a generation for it to become fully effective.
"While this ambitious long-term project gets under way, wide-ranging reform is needed now on a number of fronts to secure improvements to standards," the Commission's Chairman Andrew Tyrie said on Monday.
The BSRC will champion good practice, requiring banks to commit to improving their culture and to report back on their performance to the public each year. It will also produce an annual report highlighting progress made the industry and by individual banks, and what more needs to be done.
"While it is a step in the right direction, without effective disciplinary teeth, it may fall short of expectations," Iain Coke, head of faculty at the ICAEW, an accounting body.
Clifford Smout, a partner specialising in regulatory strategy at accounting firm Deloitte, said the body's credibility would only come as it develops a track record.
"The key challenge will be in embedding new codes of conduct so that these affect the way that individuals behave throughout a bank," he said.
Lambert told Reuters he expected a "good number" of the large international investment banks" operating in London would support the new body.
Carney will chair a panel of "respected figures" from outside the industry set up to appoint a chairman of the council and to ratify the appointment of its chief executive.
"The appointment of the Governor of the Bank of England to lead the selection process for the new chairman sends a powerful signal about the clout that the new body will have," its Chief Executive Anthony Browne said.
Lambert, 69, will serve as interim chairman but ruled himself out of the running to take the role permanently, saying he could not commit to the two to three years it will take to establish the new body and was not sufficiently independent.
The council, which will cost between 7 million and 10 million pounds ($16.83 million) a year to run, will set standards of good practice that may include whistle-blowing protocols, processes for handling small businesses in distress, dealing with conflicts of interest and managing high-frequency trading.
Lambert stopped short of following the example of the Dutch Banking Association, which this year ordered its 90,000 members to swear an oath, saying it would not have been credible.
He said the new body was not replicated elsewhere in the world and had attracted interest from authorities in Australia and Canada.
($1 = 0.5942 British Pounds) (Reporting by Matt Scuffham; Editing by John Stonestreet and Jane Merriman)