UPDATE 1-Britain says reckless bankers could face jail

* Bankers could face criminal sanctions, lose pensions

* Government must consider range of strategies forRBS-report

* Lawyers say recommendations will be tough to implement

* Government will respond by mid-July

By Matt Scuffham

LONDON, June 19 (Reuters) - Bankers who are reckless withcustomers' or taxpayers' money could face criminal charges andhave bonuses and pensions clawed back, according to proposalsbacked by Britain's prime minister on Wednesday.

Many Britons blame bankers' risk-taking for the 2008financial crisis and subsequent economic slump and were furiouswhen the former boss of RBS left the bank with a pensionof almost 17 million pounds even after a state rescue.

He later agreed to a cut and was stripped of his knighthoodbut it was one in a series of banking scandals that increasedpressure on Prime Minister David Cameron to get tougher on asector contributing billions of pounds to the British economy.

The parliamentary commission on banking standards he set uplast year after Barclays was fined for manipulatinginterest rate benchmarks said on Wednesday the law should bechanged so that bankers found guilty of "reckless misconduct inthe management of a bank" could face jail.

The UK Treasury said the new rules could be in place beforethe end of 2015 but lawyers said it would be hard to prove whena banker had taken too much risk or simply made a mistake.

Asked in parliament whether he supported the report'srecommendations on criminal penalties and pay, Cameron said:"Penalising, including criminal penalties ... bankers who behaveirresponsibly, I say yes."

Lawyers doubted that new laws would be effective.

"There is likely to be a considerable burden of proof -merely miscalculating or being negligent in an assessment ofrisk most likely won't be enough," said Michael Isaacs, head ofbanking litigation at law firm Pinsent Masons.

The commission also recommended a new pay code to betterbalance risk and reward, with bonuses deferred for up to tenyears with the aim of preventing bankers taking risks for shortterm reward, one of the factors blamed for the crisis.

It also proposed that the UK financial regulator would begranted a new power enabling it to cancel all bonuses andpension rights not yet paid out to senior executives in theevent of their banks needing taxpayer support.

WATERED DOWN

Banking industry sources said banks were likely to acceptmany of the proposals in principle, including the threat ofcriminal sanctions, but will lobby for some to be watered down,including the 10-year deferral on bonuses.

"The commission's conclusions contain many constructiveproposals to help fix the issues which have afflicted theindustry, most importantly in the emphasis on personalresponsibility and accountability," said HSBC ChairmanDouglas Flint.

The cross-party commission, which includes former Britishfinance minister Nigel Lawson and Justin Welby, head of theAnglican church, recommended senior bankers are held personallyresponsible and regulators granted greater powers.

Commission member Pat McFadden said it would be "pressingthe government very hard in the coming weeks" to make sure theproposals are implemented. The government has set itself a fourweek deadline to give a formal response.

"I think all of us who were engaged in this process over thelast year very much hope this is not a report which is going togather dust," he told Reuters.

The British Bankers Association, a lobby group, said itwould work with government and regulators to take forwardproposals from what it described as the "most significant reportinto banking for a generation".

UNPOPULAR

Bankers are deeply unpopular in Britain where the economyhas narrowly avoided a triple-dip recession and is expected toshow tepid growth at best through next year.

"I think jail sentences would be suitable," Ben Stewart, a34-year-old cabinet maker said in Whitechapel, not far from theCity of London, the traditional financial heartland.

"It's fraud a lot of what they've done. Even if it's notlegally fraud, I think by most people's moral compass, they'dfind it quite distasteful."

The commission recommended the industry adopt two newregisters for senior bankers and other employees to make sure the most important responsibilities within banks were assignedto specific individuals.

The 'Senior Persons Regime' would enable those responsiblefor failures to be identified more easily and provide a strongerbasis for action to be taken against them, the report said.

The Financial Conduct Authority, the financial servicesindustry watchdog which took over regulation of banks in April,said it was "learning from the regulatory mistakes of the past".

The commission also urged the government to immediatelyconsider a range of strategies for RBS, which is 81 percentstate-owned, including a possible break-up.

Some commission members, including Lawson, have advocatedhiving off RBS's toxic loans into a 'bad bank' leaving theremaining 'good bank' better able to lend to British businessesand households. But Finance Minister George Osborne said such amove would be complicated, time consuming and costly.

The report said the government had interfered in the runningof RBS and Lloyds Banking Group, in which it holds a 39percent stake, and said RBS was being held back by having thegovernment as its main shareholder.

The level of the government's influence over RBS has comeunder scrutiny since Chief Executive Stephen Hester was oustedlast week with the Treasury's approval.

Osborne is set to lay out strategies for returning RBS andLloyds Banking Group to full private ownership in hisannual speech to financiers in the City of London on Wednesday.