By politics.co.uk staff
The financial regulator will encourage banks to move away from riskier lending practices - including limits on income multiples for mortgages.
A report from the Financial Services Authority (FSA) chairman Lord Turner, originally commissioned by Gordon Brown at the height of the financial crisis last year, included plans for greater regulation for banks.
It calls for "fundamental changes" to bank capital and liquidity regulations and for greater regulation.
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"If it looks like a banks and sounds like a bank, we have to regulate it like a bank," said Lord Turner.
He added in future the costs of regulation will stop massive growth in profits for banks seen in the last decade.
"Those policies will impose costs on banks. Bank equities will be a lower return and lower risk investment," Lord Turner said.
"The changes recommended are profound, and the banking system of the future will be different from that of the last decade. The world's economy will be better served as a result."
Lord Turner rebutted the feeling the market always knows best.
"The financial crisis has challenged the intellectual assumptions on which previous regulatory approaches were largely built, and in particular the theory of rational and self-correcting markets," he said.
"Much financial innovation has proved of little value, and market discipline of individual bank strategies has often proved ineffective."
He added: "A global market economy remains the best means of delivering global prosperity: it requires a global banking system focussed on serving the needs of businesses and households, not in taking risks for quick return."
The report looks at more mortgage regulation to protect consumers from imprudent borrowing, and finds maximum loan-to-values is widely credited with enabling Hong Kong to weather a major property price slump.
However, arguments against mortgage regulation were aired and no final decision was made.
The Tories diescribed the report as a "carefully worded yet devastating critique" of Gordon Brown's financial management.
"The current tripartite structure, created in 1997, failed to protect Britain's economy from the build up of debt, a banking crisis, and ultimately recession," shadow chancellor George Osborne said.
"It is the clearest independent evidence that while the trigger was pulled by the US sub-prime, the gun was loaded back in the UK."
Lenders welcomed the move not set blanket bans on mortgage lending.
Brian Morris, head of savings policy, at the Building Societies Association, said: "It's good to see that the FSA has identified the drawbacks of regulating mortgage products; restrictions through regulation could further stifle mortgage lending."
Consumer groups, however, have called on the FSA to do more to maintain protection for conusmers.
Which? chief executive Peter Vicary-Smith, said: "Protecting consumers from rogue firms must be a priority if the FSA wants to rebuild public confidence in the financial services industry. The FSA must show it has real teeth by hitting companies with bigger fines and naming and shaming offenders.
"In terms of credit availability, we have gone from feast to famine. We welcome proposals designed to avoid a repeat of the current crisis but it is important that credit remains accessible to creditworthy individuals.
"If mortgages are to be capped, we must ensure that any restrictions don't shut consumers out of the market so that they can't re-mortgage and are stuck with their current provider."
The Financial Services Consumer Panel (FSCP) has also hit out at Lord Turner for not tackling poor treatment of consumers by banks.
Adam Phillips, FSCP acting chairman, said: "We are concerned that the Turner Review, for all its revealing content and excellent analysis, has not commented on the appalling way which banks have treated their customers both before and during the banking crisis.
"The review suggests that the FSA has been biased towards conduct of business rather than prudential regulation of banks.
"However recent history in terms of bank charges, the selling of PPI and mortgages shows that the FSA cannot be allowed to think it has the regulation of the consumer facing side of financial services under control."