* BoE defends axing 'guilty until proven innocent' rule
* Rule had risked legal challenge - BoE's Bailey
* Bailey would warn lawmakers if 'light touch' returns (Adds more detail, Carney comments)
By Huw Jones and David Milliken
LONDON, Oct 20 (Reuters) - British finance minister George Osborne's decision to scrap 'guilty until proven innocent' rules for bankers in Britain will help to avoid legal uncertainty and does not water down the reforms, Britain's top banking supervisor said.
Deputy Bank of England governor Andrew Bailey told a parliamentary committee on Tuesday that the banks and their lawyers "haven't won." But he said scrapping the so-called reverse burden of proof helped to ensure the new regime of banker accountability could be enforced without possible legal challenges as to whether the rules breached European human rights laws on due process.
"This is not a watering down," Bailey told the Treasury Select Committee. "I don't want a regime which has a flaw in it which they (senior managers) can exploit."
Bailey, who heads the Bank's Prudential Regulation Authority, said he was worried that the rule would have led to a "tick-box" mentality within the finance industry if it had been implemented in its original form.
The change, announced last week, eased fears in the City of London that the new rules, designed to prevent excessive risk-taking in banking, would scare away top talent.
But the finance ministry's action was also criticised by some British lawmakers as a sign that the government had given in to bank lobbying.
The original rule required senior managers to prove they had taken appropriate steps to prevent misconduct by their employees, something that had set Britain apart from its peers.
It will now be for regulators to prove that reasonable steps to prevent failings were not taken.
Bailey said there had been a lot of "noise" around the now-ditched reverse burden of proof rule. He said the new Senior Managers Regime would still significantly strengthen existing conduct rules when it is introduced in March next year.
Bankers have greeted the change with relief and lawyers said it sent a further signal that a period of tough new rules for British banks in the wake of the 2007/2009 financial crisis may be coming to an end.
But Bailey told lawmakers he would tell them if there was political pressure to return to the "light touch" supervision blamed for failing to stop the financial crisis.
Osborne said in June that he wanted a "new settlement" with the financial sector and shortly afterwards he removed Martin Wheatley as head of the Financial Conduct Authority (FCA) who had taken a tough line on the banks.
Osborne has made boosting competition and ensuring Britain is an attractive place for banks to do business, part of the Bank of England's regulatory remit.
BoE Governor Mark Carney, also appearing before the committee, suggested further easing could be on the cards, saying it would be a miracle if all the rules introduced by British and international authorities since the crisis fitted together perfectly.
"There may need to be some adjustment," he told the committee.
Carney pointed to a rule designed to restrain banks' debt levels, known as the leverage ratio, which he said could be skewed when banks were involved in certain clearing operations. "In times of stress, that which is an irritant could become much more problematic," Carney said.
In a further sign of a regulatory thaw, FCA Chairman John Griffith-Jones, said separately on Tuesday that if banks showed they had improved conduct standards and treated customers better, the watchdog could "move" on how it structures its interventions. (Editing by William Schomberg and Jane Merriman)