Alistair Darling said the Financial Services Authority (FSA) would have more powers to deal with risk-taking in banks and penalise misconduct.

The current scheme to compensate savers would be improved, he added.

Shadow chancellor George Osborne said the reforms were "a totally inadequate response" to the financial crisis.

Mr Osborne also called for more powers for the Bank of England.

Consumer protection

Mr Darling said the financial system needs to ensure robust regulation, and banks and financial institutions should be better managed.

Some of the key proposals included:
• More help for consumers - a national money advice line funded by the banks and a strengthened deposit protection scheme
• Greater competition - with the FSA and Office for Fair Trading ensuring that new players can enter the banking market
• Executive pay - the FSA to report yearly on whether banks have met the new code of conduct on remuneration, and bank boards to be strengthened
• Tougher banking regulation - banks required to hold more capital to cover any future losses and more powers for regulators to take over failing banks
• A new Council for Financial Stability - made up of the FSA, the Bank of England and the Treasury to meet regularly and report on the systemic risks to financial stability.

'Culture change'

"We also need banks and institutions that are better managed," Mr Darling said.

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

"The FSA now has powers to penalise banks if their pay policies create unnecessary risks and are not focused on the long-term strength of their institutions."

The BBC's business editor Robert Peston said the chancellor was attempting to reinforce the current tripartite system of regulation - where responsibility in a financial crisis is shared between the Bank of England, the Financial Services Authority and the Treasury.

In practice, the three institutions are supposed to work closely together and share information between themselves, while taking a lead in their own specialised areas.

But the system has been criticised by parliamentary committees for the institutions failing to communicate adequately with each other, and for not making it clear who would be in charge in a crisis.

Opposition criticism

Shadow chancellor George Osborne criticised the lack of clear lines of responsibility in financial regulation. He said instead of "clarity", Mr Darling's proposed new system would bring "confusion".

He said that, should the Conservatives come to power, they would return supervision of financial institutions to the Bank of England, and would create a separate consumer and markets regulator, effectively dismantling the current system and spelling the end for the FSA.

Liberal Democrat Treasury spokesman Vince Cable also expressed disappointment at the reforms.

"This is not so much a White Paper as a blank paper.

"Mr Darling should have used this opportunity to assert his authority over the banks - instead he is maintaining his passive role in [the government's shareholding body] UKFI, which is just not good enough.

"There will be champagne corks popping all over the City this afternoon - the chancellor's statement proves that it really is business as usual."

'Empowering consumers'

The British Bankers' Association (BBA) said banks recognised the need for change and would continue to work with authorities to ensure the "long-term success of the UK economy and the banking sector".

"We believe appropriate and effective regulation, capital applied according to risk and good quality supervision are the cornerstones of a vibrant banking community, " said BBA chief executive Angela Knight.

"We welcome moves to create better coordinated financial stability jointly with the FSA and the Bank of England."

The consumers association Which? welcomed measures to increase protection for bank customers.

"We're pleased that the government recognises the need to provide a better deal for consumers," said Which? chief executive Peter Vicary-Smith.

"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."

(http://news.bbc.co.uk/2/hi/business/8140457.stm)