LONDON, July 29 Top bankers in Britain will become directly accountable for their actions under proposals from regulators on Wednesday, with those behaving recklessly facing a spell in jail.
The Bank of England will also publish final rules on clawing back bonuses paid to bankers caught up in misconduct, and consult on closer scrutiny of how awards are made.
The measures are in response to public anger over having to bail out lenders such as Royal Bank of Scotland and Lloyds in the 2007-09 financial crisis, with few individual bankers punished.
Parliament also wants to restrain big bonuses at a time when most people have had to tighten their belts and fresh scandals emerge in the banking sector, such as Lloyds' $370 million fine this week for rigging market benchmarks.
The BoE will launch a consultation on tougher oversight of top bankers, known as the senior persons regime, as called for by a parliamentary commission on banking standards.
"The consultation paper due out tomorrow is likely to be a game-changer, developing the concepts of reckless mismanagement and the reversal in the burden of proof, and the introduction of criminal sanctions," said Omar Ali, UK head of banking and capital markets at EY consultancy.
The outline of the new regime is already known, with new powers to jail bankers for up to seven years for reckless misconduct. Top bankers would have to prove to regulators they were not aware of or had challenged dubious behaviour at the time.
Senior bankers will have to sign a statement listing their specific responsibilities, making it easier for regulators to bring them to book if something goes wrong.
"The regime is likely to be the strictest of any market or any industry," Ali said.
The Bank will publish the final version of rules it proposed in March on clawing back bonuses already pocketed.
The Bank has proposed that bankers and their bosses would have to hand back a bonus up to six years after it had been received if there has been misconduct.
Six years was proposed as this was seen as the longest period possible under British contract law.
There will also be consultation on broader pay issues.
Under European Union law, only a minority portion of a bonus can be paid upfront in cash, with the rest deferred over five years and paid in shares that vest over time.
A parliamentary commission on banking standards had recommended a 10-year deferral period, but proposing such a lengthy period could fall foul of UK contract law and the Bank is expected to come down somewhere in the middle.
The consultation is expected to look at how "buyouts" are handled or what happens to a banker's bonus pot if he leaves one firm for another.
Bankers also expect a reference to what yardsticks are used to determine good performance that should be awarded, such as the bank's return-on-equity or return-on-capital.
Top staff are waiting to see if the Bank will propose that chunks of a bonus should be paid in bonds that would be tapped to shore up the lender if it gets into trouble.
While Britain is toughening up aspects of bonuses, it is challenging an EU cap on awards from 2015 in the bloc's top court, saying it simply encourages higher fixed pay.
Several UK banks already plan to pay "allowances" to boost fixed pay to get round the cap which limits a bonus to no more than twice fixed pay, subject to shareholder approval.
The EU's banking watchdog, the European Banking Authority, will publish guidelines on permissible allowances by year end. (Reporting by Huw Jones, editing by Louise Heavens)