Senior bankers found guilty of "reckless misconduct" could face prison, according to plans backed by the U.K. Chancellor of the Exchequer on Monday.
George Osborne backed sweeping reforms of the U.K.'s financial sector, which were proposed by a cross-party parliamentary banking commission set up last year in the wake of the financial crisis and the Libor-rigging scandal.
(Read More: Recent Libor Settlements Are Just Tip of the Iceberg)
In a speech at Mansion House (the official residence of the Lord Mayor of London), Osborne said the government will introduce criminal sanctions for "reckless misconduct in the management of a bank". In addition, there will be further crackdowns on bankers' bonuses, and a "tough new regime" governing the behavior of senior bank staff.
"Last summer I called for a thorough and intensive investigation into how to improve standards in the banking system and the PCBS [Parliamentary Commission on Banking Standards] has delivered. I am pleased to say that the government will implement its main recommendations. Where legislative changes are required we will amend the Banking Reform Bill, which is currently before Parliament," Osborne said in a statement.
The U.K. will also reverse the "burden of proof" in cases of regulatory breaches, meaning senior staff will be held responsible for any contraventions in their area of responsibility.
"Cultural reform in the banking sector marks the next step in the government's plan to move the whole sector from rescue to recovery, and ensure that U.K. banks demonstrate the highest standards, and are able to support business and drive economic growth," said Osborne.
He added that the Treasury was still reviewing whether risky assets owned by partially nationalized RBS bank should be separated into a run-off vehicle, or "bad bank". During the financial crisis, £66 billion ($98 billion) was injected into both RBS and Lloyds to prevent them from collapsing. RBS received £45.5 billion, while Lloyds received £20.5 billion.
(Read More: RBS Hit by $612 Million Fine on Libor Scandal)
Osborne noted that bonus pools at U.K. banks like RBS had already shrunk as a result of previous crackdowns on outsized bonuses. He said that bonuses at RBS's investment bank were almost 70 percent lower in 2012-13 than in 2010-11, while bonuses at Barclays Capital were almost 40 percent lower.
—By CNBC's Katy Barnato