LONDON - BRITAIN'S government on Wednesday set out plans to toughen regulation of its banking sector, including greater oversight of bonuses paid to staff, following the worst financial crisis in decades.

Finance minister Alistair Darling unveiled legislation to create a Council for Financial Stability, bringing together the Bank of England, financial watchdog the FSA and the Treasury. The Financial Services Authority (FSA) would be required to produce an annual report on banks' pay policies, he told parliament.

'We need a change of culture in the banks and their boardrooms, with pay practices that are focused on long-term stability and not short-term profit,' Chancellor of the Exchequer Darling told lawmakers.

The FSA would be handed a new role of maintaining financial stability, with 'tougher powers and penalties against misconduct,' he added. Mr Darling said banks would be required to build up better capital reserves as a buffer against failure, while a new service would give consumers free impartial financial advice.

'Consumers will also get more protection, along with a greater right of redress and access to compensation if things go wrong,' he told the House of Commons.

He meanwhile dismissed calls to limit the size of banks, saying such an argument 'fails to take into account the complexity of our financial system.' Mr Darling also hit out at suggestions that retail and investment banks should be split, with their own regulatory systems.

'One regulator for one category and another for the rest seems to me to miss the point,' he said.

However the decision not to break up banks was met with disappointment by some, with independent think-tank the New Economics Foundation blasting the government for failing to 'get to grips with the root of the problem.'

'We have only 170 bank branches per million people in the UK, compared to 520 in Germany and 960 in France,' said Stephen Spratt, chief economist at the NEF. 'This is hampering our recovery and undermining enterprise... and will only be worse after the crash unless the government sets out plans to break up the failed banks to create the new regional banking system we so urgently need.'

The biggest British bank casualty of the worst financial crisis since the 1930s is Royal Bank of Scotland, which was ravaged by the credit crunch and its 2007 takeover of Dutch group ABN Amro at the top of the market. Last year, it recorded Britain's biggest-ever corporate loss of more than 24 billion pounds (S$56.4 billion), leading to a massive government bailout and leaving the taxpayer owning 70 per cent of the lender. -- AFP