* Firms call FCA decision a whitewash
* Lawmakers say RBS staff untouchable (Adds finance ministry comment)
By Huw Jones and Emma Rumney
LONDON, July 31 (Reuters) - Britain's financial watchdog should get new powers to regulate business loans after it was unable to punish Royal Bank of Scotland for its "deficient" treatment of customers, lawmakers said on Tuesday.
The Financial Conduct Authority (FCA) said it was taking no enforcement action against the bank or staff in its Global Restructuring Group (GRG) unit, accused by small firms of stripping their assets between 2008 and 2013.
FCA Chief Executive Andrew Bailey said the watchdog's powers to take such action were very limited given that commercial lending is largely unregulated.
"After carefully considering all the evidence we have concluded that our powers to discipline for misconduct do not apply and that an action in relation to senior management for lack of fitness and propriety would not have reasonable prospects of success," Bailey said in a statement.
The FCA, created in the aftermath of the financial crisis, said it could not take disciplinary action such as fining RBS or an individual.
Nicky Morgan, who chairs parliament's Treasury Select Committee, said the FCA's decision would be disappointing and bewildering for firms caught up in GRG's actions and called for giving the watchdog greater clout.
"This demonstrates the need for a change in how lending for SMEs (small and medium-sized businesses) is regulated," Morgan said in a statement.
"The government should ... urgently consider what additional powers the FCA requires to act in cases such as GRG," she said.
The RBS unit has been accused by customers of driving them to bankruptcy in order to pick up their assets on the cheap.
The FCA's review found no evidence that RBS transferred otherwise viable small businesses to GRG to profit from their restructuring or insolvency.
"It did, however, identify that many aspects of GRG’s culture, governance and practices were deficient and that in some areas the inappropriate treatment of customers was widespread and systematic," the FCA said.
"These failures are significant and might ordinarily trigger disciplinary action if they occurred in a regulated business," it said.
"The fact that we can’t take action in no way condones the behaviour of RBS. We expect high standards from the firms we regulate and RBS fell well short in its treatment of GRG customers," Bailey said.
RBS, in which the state has a 62 percent stake after a taxpayer bailout during the financial crisis, has rejected the most serious allegations against the unit, but it has accepted some wrongdoing.
The finance ministry said the mistreatment of businesses by RBS' GRG unit was unacceptable.
"We are carefully examining the on-going work of Parliament, the FCA, and UK Finance on business lending, and will respond in the autumn once it has all concluded," the spokesman said.
Kevin Hollinrake, a lawmaker who co-chairs the All-Parliamentary Group on Fair Business Banking, said the FCA should release all the evidence it has on GRG.
"As lawmakers we have an obligation to the public to ensure that those who are responsible are accountable and not untouchable, as indeed is the case now where the individuals responsible are protected by the regulatory inadequacy of our current system," Hollinrake said in a statement.
Nikki Turner, director of the SME Alliance, which represents small firms affected by bank misconduct, said members of the group were "shocked and disappointed" by the FCA's decision.
"We were not expecting this whitewash and we can only wonder who the FCA has interviewed to reach its bizarre and cynical conclusions?" Turner said.
RBS Chairman Howard Davies said the bank's board welcomed the FCA's decision, and continues to focus on ensuring past mistakes cannot be repeated.
"We ... will reflect carefully on its [the FCA's] findings to learn any further lessons from what was a hugely challenging time for the bank, its customers and the wider economy," he said in a statement.
In an internal memo released earlier, a junior manager told GRG staff: "Rope: Sometimes you just have to let customers hang themselves. You have then gained their trust and they know what's coming when they fail to deliver."
Other correspondence told staff to "Just Hit Budget".
The FCA said the "Just Hit Budget" document should not have been produced or circulated, though it said there was no evidence that senior management knew or approved it.
The watchdog said it found no evidence that any member of senior management was dishonest or lacking in integrity.
RBS set aside 400 million pounds ($525 million) to compensate thousands of small businesses that said they were mistreated by the GRG.
The bank said this month however that the scheme would close to new complaints after paying out just 10 million pounds so far for direct losses.
RBS shares were trading 1.6 percent higher at 1205 GMT, outpacing the broader market. ($1 = 0.7605 pounds) (Reporting by Huw Jones and Emma Rumney; Editing by Adrian Croft and Hugh Lawson)