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Britain's banks were today told to accept tougher regulation and take fewer risks in their quest for profits.
A long-awaited White Paper on banking reform unveiled a series of measures to promote stability, including forcing institutions to build up bigger cash cushions against future crises.
Consumers will get "health warnings" about risky financial products and banks could be punished with higher capital requirements if they refuse to heed the calls to stop rewarding reckless deals with bumper bonuses.
Outlining the measures in the Commons this afternoon, Chancellor Alistair Darling blamed the worst global recession since the Second World War on too much unregulated risk. "Financial institutions in many countries took on too much risk," he said.
The Chancellor said weak bank directors did not have enough understanding of the risks their products created, while "irresponsible pay practices" promoted ever-greater gambles.
But he also conceded that the tripartite regulatory system set up by Gordon Brown a decade ago had not been up to the job. "Regulators and governments must learn from the events of the past two years," he said.
But while Mr Darling promised to keep and strengthen the tripartite system, boosting the importance of the Financial Services Authority, shadow chancellor George Osborne announced he would scrap the system and put the Bank of England in charge.
Among the key announcements, Mr Darling said he would chair a new Council for Financial Stability which will act as watchdog against dangerous conditions.
His announcement dismayed supporters of Bank of England governor Mervyn King, who was lobbying to be given the key role over macro-prudential strategy. Instead, he must settle for the right to publish twice-yearly reports highlighting issues of concern, which the council will have to consider.
The FSA will get more status under Mr Darling's plans, including a statutory objective to help maintain financial stability and "tougher powers and penalties against misconduct".
Those powers will include the right to make banks increase their capital reserves if they are thought to be taking too many risks or even paying bonuses that encourage risk-taking.
This may give teeth to the promised campaign to reform the City's bonus culture.
"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," said Mr Darling.
But Mr Osborne dismissed the proposals as a "totally inadequate response" to the credit crunch. He said he would replace the entire system if the Tories win the election, expected next May, and put the Bank of England in the driving seat.
"It can't do any of these things, the Bank of England, unless it has the experience and knowledge of their day-to-day regulation," he said. "So let me make it clear to the Chancellor today, the next Conservative government will abolish the tripartite system."
Consumer group Which? welcomed the promise of stronger protection for the public.
Chief executive Peter Vicary-Smith said: "Warnings about risky products, universally available money guidance and more choice on the high street will all help to empower consumers in their dealings with the financial world."
Reader views (11)
Frankly, I couldn't give a damn what Mr Darling has to say anymore. In fact, I haven't even read the article ... just scrolled down to comments hahaha 
- Marianne, SW France/London
Little strange coming from him. He should be the one being stamped!
- Jacqueline, Hampstead, London
but, but, but, he's behind the times already. Banks are already offering higher salaries to replace bonuses - which neatly circumvents the issue, whilst still rewarding the reckless with cash far beyond their real worth
- Nick, London
@Dave Davies
IFA's should also have a risk factor, they are just as capable of losing money as the investment bankers.
IFA's happily take fees or commissions from their clients and only look at their portfolio once or twice a year.
I am glad that I have taken the time to study the markets and make my own decisions, much more profitable even though it does consume a little time each day.
- Frank Bell, London, England
I think A.Darling should be stamped with a Health/Wealth warning. His government has certainly affected my health/wealth with his tax and spending philosophy. Brown and Darling are the only Chancellors we have had for over 12 years and they are still creating havoc. Roll on the revolution.
- E.Nuff, London
Once again, Darling & Brown will defend the indefensible (the tri-partite system set up by Grodon Brown when he was Chancellor. Everyone knows that the tri-partite system failed to regulate the Banks adequately, and Mervyn King (Govenor of the Bank of England) has said clearly that he does not have the necessary tools to do so even now. But Brown just can't accept or acknowledge when he's made a mistake. As a result we get yet another set of half-baked proposals that, as always, miss the really key issue - the Regulatory system is inadequate. Yet ANOTHER committeis not going to change that. If previous experience is anything to go by, this mix of BoE and FSA mandarins will spend their time trying to out do each other.
- Malcolm, London
So you are getting tough with the banks darling ?
Does that include top earners @ RBS, you know, that bank we own ?
- Brian, wales,UK
This is laughable ! The only way to stop investment banks taking huge risks is to deny them the retail banks depositors capital which they use to get extra leverage.
Given that the taxpayer is currently shoring up the depositors capital at RBS, you'd have thought the Government would have learned this rather important lesson, and looked to go the way of a Glass Steagall II arrangement.
But alas, Darling and Co have taken advice on the way forward from the very people who are responsible for the crisis and stand to lose the most from a retail/investment banking split.
Hence this token gesture really does nothing to prevent the seeds being sown once again for another crisis which the taxpayer will not be able to rescue
- John, Twickenham
Will MP's also be stamped with Health Warning, or be given a start rating according to their competence, number of days attending the House, expenses rating, Number of question asked, number of times voted against their own party. Five stars would be the best. Four - acceptable. Three - needs a talking to by his constituency. Two - last warning. One - goodbye. Now. How many stars would you rate your local MP? Mine - two.
- Albert Hall, hove england
Pointless. If you visit an IFA, they already have risk indicators for products.
- Dave Davies, Basingstoke, Hants
That's rich, coming from the Government who is still spending and borrowing. Perhaps they should get their own house in order before doing anything else! Do as you preach.
- Jk, London
