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LONDON (Reuters) - Bank takeovers should face deeper scrutiny and directors be more accountable for their actions, Britain's finance watchdog said in a long-awaited report into Royal Bank of Scotland's (RBS.L) near collapse.
The Financial Services Authority (FSA) said in a 452-page report on Monday that RBS managers, like former chief executive Fred Goodwin, were most at fault in the bank's brush with bankruptcy, which was only averted by a 45 billion pound ($70 billion) government bailout in 2008.
The regulator, which is due to be broken up next year with much of its remit returning to the Bank of England, was also critical of its own actions and of former Prime Minister Gordon Brown for encouraging a "light touch" regulatory regime.
The report, like earlier investigations, said there was no prospect of successful legal action against former RBS executives as there was no evidence of criminal wrongdoing, although they had made a series of bad decisions.
But it said they could still be disqualified from being directors in future, pending a decision by the government, and suggested the law could be changed.
"The question I have raised for the future is whether the balance of the law is right," FSA Chairman Adair Turner told Sky News, arguing that new rules could ensure directors face personal financial consequences if a bank failed.
"The point about banks is banks are different. When things go wrong in banks you can screw up the whole economy rather than just shareholders' interests. We haven't recognized that enough in the past."
Peter Wright, a litigation partner at London-based law firm Fox Williams, said it was hard to reconcile the lack of punishment with the scale of RBS's failings.
He warned, however, of the dangers of singling out directors of banks for extra liabilities.
"This could simply mean that individuals with the highest risk tolerance, rather than the most skilled, would be prepared to accept the most systemically important roles that affect us all."
The FSA said banks should face closer scrutiny of their takeover plans, identifying RBS's highly-leveraged 16-billion-euro purchase of parts of Dutch bank ABN AMRO in 2007, just before a financial markets meltdown, as its biggest mistake.
"The decision to make a bid of this scale on the basis of limited due diligence entailed a degree of risk-taking that can reasonably be criticized as a gamble," it said, adding the information made available to RBS by ABN AMRO in April 2007 amounted to "two lever arch folders and a CD."
In future banks should need formal consent from the regulator for a takeover and obtain independent advice from an adviser whose pay is not linked to a successful deal, it said.
The British government welcomed the report, saying it showed its reforms of the banking sector were right, while RBS's new management said it had learned the lessons of past and was building a new bank.
RBS, which came within hours of running out of cash in October 2008, is 83 percent owned by the government following the bailout. The taxpayer is currently sitting on a 25 billion pound loss at today's share price.
The FSA said flaws in its own supervision "provided insufficient challenge" to RBS, but also argued it was under pressure from the government to take a hands-off approach.
There was "a sustained political emphasis on the need for the FSA to be 'light touch' in its approach and mindful of London's competitive position," the report said.
On several occasions in 2005 and 2006 prime minister Brown said he didn't want "unnecessarily restrictive and intrusive regulation" to impair London's competitiveness, it said.
Originally a small Scottish bank, RBS rose to become one of the world's biggest thanks to a string of takeovers and aggressive expansion. It was brought to its knees by a decade-long acquisition spree led by Goodwin and his strategy of running the bank with levels of capital that proved too low.
"The multiple poor decisions that RBS made suggest ... that there are likely to have been underlying deficiencies in RBS management, governance and culture which made it prone to make poor decisions," the report said.
Goodwin has been slammed for a management style that discouraged dissent among senior staff -- his daily morning meetings became known as the "Morning Beating" -- but former board directors told the FSA they did not feel bullied by Goodwin, the report said.
The FSA also investigated a court injunction obtained by Goodwin to prevent publication of details of his private life, and concluded "it is irrelevant to the story of RBS's failure."
($1 = 0.6402 British pounds)
Writing by Mark Potter; Reporting by Steve Slater and Sudip Kar-Gupta; Editing by Sophie Walker