U.K. Chancellor of the Exchequer George Osborne backed tougher rules for the banking industry, including legislation to jail reckless bankers and giving regulators the power to defer bonuses for as long as 10 years.

In its response to the recommendations of the Parliamentary Commission on Banking Standards, the government said today it plans to implement the main findings, with new laws if needed.

“The government is determined to raise standards across the banking industry to create a stronger and safer banking system,” Osborne said in a statement. “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.”

Pay reform is part of a program of sweeping change proposed by the commission, a cross-party group of lawmakers set up last year by Osborne after a series of scandals and five years of poor returns for the financial industry. The recommendations being adopted go further than changes introduced by U.K. regulators after the financial crisis, which forced bankers to wait as long as five years to get their bonuses.

Osborne plans to introduce legislation later this year that would make “reckless” management of lenders a crime, meaning executives of failed firms could face jail time.

The government also “strongly supports” calls that a substantial part of variable compensation for the highest earners at banks should be deferred for up to a decade to reflect the length of time it takes for profits and losses from transactions to be realized.

Longer Wait

“The introduction of regulatory deferral periods for remuneration awards has played an important role in restructuring pay and reducing incentives to take excessive risk and therefore supporting prudential soundness,” it said. “Extended deferral periods can help to further improve the alignment of individual and institutional incentives by ensuring a longer period during which variable pay can be subject to the application of malus.”

Firms should nonetheless retain the flexibility to set deferral periods, it said.

Other suggestions backed by the government include powers to claw back bonuses awarded by banks that receive state aid and paying staff in bail-in bonds that convert into capital to absorb losses, leaving managers exposed to losses if their firm goes bust.

The Treasury is examining the case for breaking up Royal Bank of Scotland Group Plc and hiving off its worst-performing assets into a “bad bank,” as demanded by the commission.

Osborne plans to introduce amendments to the Financial Services (Banking Reform) Bill to include some of the commission’s proposals later this year. Lawmakers are due to debate the bill today.

Osborne rejects the commission’s call to scrap the body overseeing the taxpayer stakes in Lloyds Banking Group Plc and RBS. He is also skeptical about imposing tighter limits on “leverage,” a key measure restricting a bank’s size relative to its equity capital, according to a Treasury official.