Reckless bank bosses should be jailed and pay rules overhauled to end rewards for failure, according to a report by MPs and peers.

The Parliamentary Commission on Banking Standards called on the government to hold senior bankers personally responsible for malpractice and introduce a new criminal offence for reckless management that carries a custodial sentence.

Its long-awaited final report, entitled “Changing banking for good”, the commission also recommends giving regulators the power to defer bonuses for 10 years under plans to stamp out excessive pay practices.

The recommendations come as part of wide-ranging proposals to raise standards in the banking sector in the wake of recent scandals, including setting up a new professional code of conduct and licensing bankers.

Andrew Tyrie, chairman of the commission, said: “Recent scandals, not least the fixing of the Libor rate that prompted Parliament to establish this commission, have exposed shocking and widespread malpractice.

“Taxpayers and customers have lost out. The economy has suffered. The reputation of the financial sector has been gravely damaged. Trust in banking has fallen to a new low.”

He said regulatory failures were also responsible and called on the government to “get on with the job” of implementing reforms.

A treasury spokesman said it was a “very impressive piece of work”.

He said: “There are many recommendations in it which will help the government’s plan to create a stronger and safer banking system.”

He said the government will support legislation where it is needed, and will amend the Banking Bill currently before parliament to ensure changes are quickly enacted.

He added: “The Government publicly welcomes the commission’s recommendations on increased personal responsibility, especially at a senior level, increased professional judgment by regulators, and better functioning markets.

“We will now get on with a swift response and will report before the summer recess.”

The commission stopped short of recommending a break-up of Royal Bank of Scotland into a "good" bank and "bad" bank, but said the option must be considered urgently as it warned current plans to return RBS to the private sector risked being "insufficient".

It wants the treasury to publish a detailed analysis of such a move by September this year.

The government also came under heavy fire for “political interference” in RBS and fellow state-backed lender Lloyds Banking Group, with the report calling for UK Financial Investments (UKFI) - the body in charge of managing the taxpayer stakes - to be scrapped.

The 570-page report comes ahead of chancellor George Osborne’s annual Mansion House speech this evening, when he will address the issue of how to reform Britain’s banks.

Mr Osborne has confirmed he will outline the next steps for the state-backed banks following the report’s recommendations.

The commission has also recommended setting up a licensing regime to “empower the regulator to judge those whose behaviour could seriously harm the bank, its reputation or its customers”, against a new set of banking standards rules.

Mr Tyrie added: “Personal accountability is little more than an illusion in many parts of banking, especially at senior levels.

“For too long, senior figures have appeared to be beyond enforcement.”

On pay, the commission said a bonus cap was “crude” and unworkable, but recommended a new remuneration code and powers to cancel outstanding financial awards in the case of a taxpayer bailout.

The report also calls for a number of further inquiries, such as a study into the retail and small business banking sector and a report on reforms to improve customer choice, including current account switching.

Shadow chancellor Ed Balls welcomed the report as a "radical blueprint for change" in the banking sector.

He said: “Britain needs reformed banks to work for the economy, serve their customers and better support businesses for the long term.

“That’s why the Government, Parliament and the banks must act without delay on the report’s recommendations.”

Anthony Browne, chief executive of the British Bankers’ Association, hailed the report as the “most significant report into banking for a generation”.

“We look forward to working with government and regulators to take forward the constructive proposals contained in the report, learning the lessons of recent years in order to deliver a banking industry which is trusted, financially sound and serves the interests of its customers, shareholders and society,” he said.

But some of the proposals met with a lukewarm reaction in the City.

Gary Greenwood at Shore Capital Stockbrokers called the recommendations “alarming”.

He said: “We question whether the industry will be able to attract top talent, given the proposed restrictions on pay and risk of being sent to jail for getting the job wrong.

“We think the proposal to put financial safety ahead of shareholder interests suggests an industry that is unlikely to generate above average returns for its owners in the long run.”

PA