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The City regulator, the Financial Conduct Authority (FCA), has shelved plans for an inquiry into the culture, pay and behaviour of staff in banking.

The FCA had planned to look at whether pay, promotion or other incentives had contributed to scandals involving banks in the UK and abroad.

The shadow chancellor said it was a "huge blow to customers and taxpayers".

The Treasury denies involvement in the decision - which some commentators have suggested was politically motivated.

The FCA said it had decided a "traditional thematic review" would not help it achieve its "desired outcomes", promising instead to encourage the "delivery of cultural change".

Mark Garnier MP, a Conservative member of the Treasury Select Committee said he was "disappointed" by the decision.

Banks around the world have faced huge fines from regulators for their involvement in numerous scandals.

In May the news agency Reuters calculated that 20 global banks had paid £152bn in fines and compensation to customers since the 2008 financial crisis.

'Costly mistake'

Shadow chancellor John McDonnell told BBC Radio 4's World at One programme the decision by the FCA was "shocking" and could prove a "dangerous and costly mistake".

He said: "This will be a huge blow to customers and taxpayers who are all still paying the price for the failed culture in the banking sector that's been widely attributed to be among the main causes of the crash and the scandals over Libor and price-fixing."

Mr McDonnell added it was "worrying" that the FCA was replacing the review and replacing it with a "potentially watered-down version", when there could potentially still be "cultural mispractice" in banking.

He said Chancellor George Osborne could not "stay silent on this issue" and called for him to use his influence to keep the review going.

Liberal Democrat leader Tim Farron said any hope of change had been "dashed".

'Shift in tone'

The decision to drop the inquiry comes six months after FCA boss Martin Wheatley - who was originally hired because of his reputation as a tough regulator - was effectively sacked by Mr Osborne following two tumultuous years in the role.

Many in the City had found Mr Wheatley's approach too combative and raised concerns about some of the language he used in reference to the banking industry.

Percival Stanion, head of multi-asset strategies at Pictet Asset Management, told BBC Radio 4's Today programme there was "definitely a shift in tone towards the banks".

He suggested that it was "no coincidence" that the investigation was being dropped at a time when HSBC was reviewing whether to keep its headquarters in London.

HSBC has been a vocal critic of the bank levy, which Mr Osborne reduced in his summer budget following the general election.

Mr Wheatley was succeeded by his deputy, Tracey McDermott, in September on an interim basis. The chancellor has reportedly struggled to attract a permanent replacement, with at least one leading financial regulator said to have turned the job down.

Analysis: Business correspondent, Simon Jack:

This will be seen by many as further evidence that regulators and the government have decided to take a softer line with the banks and bring the "banker bashing" era to a close.

The government is keen the UK, and London in particular, doesn't lose its appeal as a place for global banks to do business and employ highly paid (and taxable) people.

There have been a series of moves perceived as bank friendly in the last year. Martin Wheatley, the former chief executive of the FCA and a fierce critic of the banks was eased out of his position earlier this year and is yet to be replaced.

A time limit is being proposed on compensation claims for those mis-sold payment protection insurance (PPI) - a scandal that has seen the banks haemorrhage £25bn to date and the bank levy, a charge on UK banks worldwide assets was replaced with a less onerous charge on domestic profits.

'Encourage cultural change'

The FCA also said the Treasury had not been involved in the decision to drop the inquiry.

It added that a focus on the culture in financial services firms remained a priority, saying: "We have decided that the best way to support these efforts is to engage individually with firms to encourage their delivery of cultural change as well as supporting the other initiatives outside the FCA."