* RBS strategy update 'crucial' for investment case
* Capital, future strategy must be tackled before sale
* Government holds 81 percent stake after 2008 bailout
* UKFI says restructuring may accelerate process
LONDON, Nov 12 (Reuters) - Part-nationalised Royal Bank of Scotland must address issues over its capital and future strategy before the government can start selling its shares, the new head of the agency managing Britain's bank stakes told lawmakers.
James Leigh-Pemberton, who will become executive chairman of UK Financial Investments (UKFI) in January, said the outcome of new RBS Chief Executive Ross McEwan's strategic review, due in February, would be a crucial part of the investment case.
"There are certain issues in relation to RBS which absolutely have to be tackled as a precursor to successful reprivatisation: sufficient capital; strategic focus on businesses where they enjoy competitive advantage and higher returns and the normalisation of the capital structure," Leigh-Pemberton told parliament's Treasury Select Committee.
Britain is keen to offload its stakes in RBS and state-backed Lloyds Banking Group, having pumped a combined 66 billion pounds ($105 billion) into the banks to keep them afloat in the 2008 financial crisis.
RBS, 81 percent owned by taxpayers, said earlier in November it would create an internal "bad bank" to fence off its riskiest assets, part of a raft of measures designed to heal its relationship with the government and speed up its eventual privatisation.
"The new plan will enable reprivatisation at least on the timetable that would have been achieved otherwise, and possibly scope to act a little faster," Leigh-Pemberton said.
Britain's financial regulator said in June that RBS had a capital shortfall of 13.6 billion pounds, the biggest of any UK bank. McEwan sees its restructuring plan as part of a process of reshaping the bank to remove all concerns around its capital strength within the next 2 to 3 years.
The bank plans to hold a core capital ratio of about 11 percent by the end of 2015 and 12 percent a year later, which is 3 percentage points above its current position.
Britain began selling shares in Lloyds at a profit earlier this year, but a sale of its stake in RBS is much further off, with taxpayers still sitting on a paper loss of 15 billion pounds at current prices.
Shares in RBS were down 2.6 percent at 1250 GMT, compared with a 0.7 percent decline in the European banking index .
Robin Budenberg, the outgoing chairman of UKFI, told lawmakers that Finance Minister George Osborne had proposed steeper cuts in bankers' pay than were "commercially acceptable" at RBS and Lloyds, and so the agency had limited the scale of the cuts.
The lawmakers had questioned whether UKFI was run at "arm's length" from the government, and made its decisions purely based on commercial grounds.