UPDATE 1-UK banking watchdog reduces reach of new accountability rules

(Adds new consultations from regulators; background)

By Huw Jones

LONDON, Feb 23 (Reuters) - It has been decided that newrules making senior bankers in Britain more accountable fortheir actions will not now apply to non-executive directors whodon't have specific duties such as scrutinising bonuses,regulators said on Monday.

The rules, known as the senior managers' regime and due totake effect by 2016, are designed to plug a gap highlighted bythe 2007-09 financial crisis when few individuals were heldresponsible after taxpayers had to rescue several lenders.

They will cover board members and senior staff such as heads of trading desks to make it easier to punish bad behaviour witha variety of sanctions, including fines and dismissal.

But bankers complained after a draft of the new rules wasput out to public consultation last year that the net was beingcast too widely, making it harder to recruit non-executives.

"Non-executive directors play a vital role in providingchallenge to and an independent oversight of the executivedirectors," the Financial Conduct Authority's chief executive,Martin Wheatley, said on Monday.

"Including all NEDs in the new regime would risk theunintended consequence of changing the whole nature of thisvital role."

The chairman, senior independent director and chairs of thebank's risk, audit, remuneration and nominations comittees willbe the only board members to come under the new rules.

The Prudential Regulation Authority (PRA), which supervisesbanks for solvency, said the same type of non-executivedirectors at insurers, apart from nomination committee chairs,will also come under the new rules.

The FCA is to consult in the coming months on applying therules to British branches of foreign banks. Senior staff at theUK subsidiaries of foreign banks are already included.

Bankers say a feature of the rules which puts the burden ofproof on the accused due to a "presumption of responsibility",will make it harder to recruit top officials.

An individual will be sanctioned for rule breaches unlessthey can demonstrate that they took reasonable steps to stop oravoid a problem.

The PRA published examples on Monday of what actions couldconstitute such reasonable preventative steps, a step the FCAwill also make soon.

The presumption of responsibility and criminal sanctions fora new charge of reckless behaviour causing a bank failure won'tapply to insurers, the PRA added.

Regulators also set out how to make it easier for bankingand insurance staff to blow the whistle on bad behaviour withoutfear of reprisals.

Firms will have to appoint a "whistleblowers' champion" tooversee whistleblowing arrangements, report annually on how theywork, and tell the regulator where an employment tribunal findsin favour of the whistleblower.

"Whistleblowing can be an emotive issue but if firms have anappropriate regime in place it can enable the firm to identifyissues and remedy them before they become a significantregulatory or legal failing," said Michael Ruck, a lawyer atPinsent Masons. (Editing by David Goodman and Greg Mahlich)