SYDNEY (Reuters) - An Australian inquiry into financial sector misconduct claimed its first scalp on Friday as the CEO of the country’s largest wealth manager stepped down over revelations of board-level deception and misappropriation of funds.

The departure of AMP Ltd's AMP.AX Craig Meller came as the government vowed to double prison terms for financial crimes, dramatically increase penalties and ramp up the investigative powers of the corporate regulator following shocking admissions of misconduct to the Royal Commission inquiry.

Not only has the start of the year-long inquiry been a publicity disaster for Australia’s major lenders, it has also put the conservative government - which had initially opposed a commission despite years of scandals including rate-rigging and alleged money-laundering - in a tight spot.

Faced with daily revelations of wrongdoing at the highest levels of corporate Australia, the government is now under mounting pressure to extend the inquiry beyond its February 2019 deadline, meaning it would run concurrently with the next federal election.

Treasurer Scott Morrison, who once dismissed opposition calls for a Royal Commission as “crass populism”, on Friday said the government would raise criminal penalties for corporate crimes to a maximum of 10 years in jail, from 5 years currently.

Offending companies would face fines up to A$210 million ($162 million), versus A$10 million now. Australian Securities and Investments Commission (ASIC) would get the power to intercept internal communications of companies if necessary, Morrison said.

“They are not victimless crimes,” Morrison told a press conference. “We need to set the tone ... so people understand that misleading regulators about serious issues such as this is no victimless offence, and it won’t carry a victimless penalty.”

FILE PHOTO: Craig Meller, the CEO of AMP, briefs the media on the company's full year results in Sydney, Australia February 19, 2015. AAP/Dean Lewins/via REUTERS/File Photo

The changes were the result of years of planning and were not a knee-jerk reaction to the inquiry, he said.

“PERSONALLY DEVASTATED”

AMP executives admitted in testimony this week that the company had lied to the corporate watchdog for almost a decade to cover a practice of charging customers for services it did not provide.

Chairman Catherine Brenner issued an unreserved apology for “misconduct and failures in regulatory disclosures in our advice business”, as she announced Meller’s exit along with a review of the company’s governance.

Government data prepared for the Royal Commission, which has the power to subpoena documents and compel top executives to testify in public, shows more than 80,000 consumers have been given bad advice by financial institutions over the past decade, costing them a total A$5 billion ($3.9 billion).

This week’s hearings have been particularly brutal.

A nurse gave tearful testimony on Thursday about losing her home after taking advice from Westpac Banking Corp WBC.AX, while lawyers presented evidence that Commonwealth Bank of Australia CBA.AX, the country's biggest bank, knowingly charged dead clients for counsel for years.

But the revelations about AMP for the first time showed direct board-level involvement in hiding misconduct from ASIC, leading to calls for the watchdog to play a far more aggressive role than it has in the past.

MELLER’S EXIT NOT ENOUGH

The Australian Shareholders’ Association said Meller’s resignation was “not sufficient” and called for Brenner to explain the board’s involvement in the case or step down.

The ASA “wants to ask Catherine Brenner about the reported interference with the production of the independent report”, it said in a statement.

“If this is not able to be provided, her position as chair is untenable and she should resign,” said the ASA.

“The ASA is having further discussions with the company to assess how rigorous these directors are in dealing with the ongoing issues,” it added.

The association represented about 700 shareholders at the last AMP annual general meeting, the ASA website shows.

AMP shares have lost over A$1.2 billion in market value since the revelations came to light on Tuesday. The stock ended down 0.5 percent on Friday, in a weak overall market .AXJO.

Meller said he was “personally devastated by the issues which have been raised publicly this week”, and while he did not condone making misleading statements to the regulator they had occurred under his watch so his resignation was appropriate.

“This is not the AMP I know and these are not the actions our customers should expect from the company.”

AMP Director Mike Wilkins, a former CEO of Australia's biggest general insurer, Insurance Australia Group Ltd IAG.AX, will step in as AMP's acting chief until a permanent replacement for Meller is found, the company added.