The proposals, among the key recommendations of 'Changing banking for good', place pressure on chancellor George Osborne to overhaul the banking industry ahead of his Mansion House speech to the City tonight, where he will set out plans for the return of Royal Bank of Scotland (RBS) and Lloyds Banking Group to the private sector.
Osborne set up the Parliamentary Commission on Banking Standards in 2012 to report on professional standards and culture of the UK banking sector, in the wake of the Libor rate-rigging scandal.
The commission's fifth report, led by conservative MP Andrew Tyrie, released today, attacks the accountability and culture of bankers.
"Much of the rulebook should be torn up and rewritten, with even plans made since the financial crisis scrapped and replaced," the report stated.
Excessive risk-taking
The cross-party report said bankers are given incentives to take "excessive risks", shareholders "do not understand" what is happening in their firms, and politicians are "at risk of falling under the sway of industry lobbyists".
It noted that current remuneration packages incentivised banker misconduct and reinforced a culture where poor standards were considered the norm.
"Risks and rewards in banking have been out of kilter. Given the misalignment of incentives, it should be no surprise that deep lapses in banking standards have been commonplace," Tyrie said.
"The health and reputation of the banking industry itself is at stake. Many junior staff who may have done nothing wrong have been impugned by the actions of their seniors. This has to end. Rewards for success should be better focused on generating long-term benefits for banks and their customers."
In its report, the commission recommended deferring bonuses for up to 10 years, with payouts linked to the long-term performance of the bank and employee.
Poor accountability
Too many bankers, especially at the most senior levels, have operated in an environment with insufficient personal responsibility, the report claimed. Top bankers "dodged accountability" for failings on their watch by "claiming ignorance" or hiding behind "collective decision-making".
The report also attacked poor governance and controls, highlighting a rarity of whistleblowing. To combat this, the commission recommended individual responsibility for a named non-executive director to oversee "fair and effective" whistleblowing procedures and be held personally accountable if an individual suffers as a consequence of blowing the whistle.
Shadow chancellor Ed Balls urged Osborne to take action.
"I hope the chancellor won't drag his feet. We need our banks working well in the future - this report shows us what to do," Balls said.
Other key proposals from the report included:
- Deferred pay and pension rights should be cancelable if a banker misbehaves or - in the case of senior managers - if the bank has to be bailed out.
- An audit on the number of women on trading floors, on the grounds that employing more female traders could reduce risk.
- Banks should be legally required to put financial safety ahead of shareholder interest.
