City finance lawyers have questioned a call by the chairman of the Financial Services Authority (FSA) to change the law in order to make is easier to hold directors and board members of failed banks personally liable for the consequences of their decisions.

The proposed overhaul is contained in a damning report into the failure of The Royal Bank of Scotland (RBS) published yesterday (12 December) by the FSA board, in the wake of the bank's £45bn rescue by the Government in 2008.

The long awaited report concludes that the bank's failure resulted from poor decisions made by RBS management – including an ill-judged acquisition of ABN Amro – as well as deficiencies in the global capital regime and flaws in the FSA's own supervisory approach, which failed to challenge RBS.

However, it goes on to state that the regulator was legally hamstrung from pinning responsibility for the collapse onto individuals as it could not prove that their personal actions fell below FSA standards, and calls for a change in the law.

In the report, FSA chairman Adair Turner suggests a number of possible options that would allow action to be taken against the senior management of failed banks. The first would be a strict liability approach ensuring a bank's failure would be followed by enforcement activities such as bans or fines; the second option would be an incentive-based approach involving either an automatic ban for senior executives and directors of failed banks from holding similar positions in the future, or deferring pay so that some could be forfeited in the event of a failure.

Turner said: "The fact that no individual has been found legally responsible for the failure begs the question – if action cannot be taken under existing rules, should not the rules be changed for the future?"

He continued: "There are important pros and cons of these different ways forward, and complex and important legal issues which would need to be considered. But by one means or another, there is a strong argument for new rules which ensure that bank executives and boards place greater weight on avoiding failure. The options for achieving this merit careful public debate. The FSA has committed to publishing a discussion paper on the options in the New Year."

Baker & McKenzie financial services regulatory partner Ian Mason commented: "It is quite a big discussion, but I think that the report will result in the Government looking into whether it should be made easier to pin bank failure on individual directors. The pitfall is that the bigger the stick on financial services directors, the less likely it is that good people will actually want to take on those roles. The difficulty is that you may end up taking the fall for something that was not your fault."

Ashurst financial services regulatory partner Rob Moulton said: "The FSA will find it difficult to come after individuals if an institution fails because failure is not normally the responsibility of any given individual. The human rights of individuals need to be protected, and unless a failure is properly proved to be the result of an individual's actions, a regulator cannot expect successfully to take action against them.

"If an automatic ban is thought to be a good idea, then politicians should enact it and take responsibility for it, rather than expecting regulators somehow to bring it about."

One head of finance at a rival top 20 UK firm warned: "I don't think it is a very good idea. It has the dangerous potential of causing problems within the whole financial institution. A law change like that may play to the public gallery; however, the irony is that if it were to go ahead, banks would be forced to further increase pay to senior management figures for taking on the additional liability."

Many partners declined to comment on the report, even in general terms. RBS is a key client for a host of City law firms, including magic circle trio Clifford Chance, Allen & Overy and Linklaters, all of which declined to comment.

The publication of the report comes as the FSA is set to split into two separate regulators – a Prudential Regulation Authority and Financial Conduct Authority. The body has also set up a Financial Policy Committee, with the responsibility to identify and respond to emerging systemic risks.

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