The financial regulator is expected next week to sharply criticise its own failings for not preventing the country's largest bank failure and label the aggressive expansion that felled Royal Bank of Scotland a reckless gamble.

A keenly-awaited, 500-page report into how former RBS directors and regulators allowed the bank to spectacularly implode at the height of the credit crisis in 2008, forcing a huge taxpayer bailout, is expected to be published on December 12.

Copies are being thumbed through in a special meeting room at the Financial Services Authority's (FSA) headquarters in east London by those named -- and their lawyers -- who fear it could open them up to further shareholder litigation.

One source familiar with the process, who declined to be named, said security personnel were ensuring nothing left the room as people took time to digest a bank failure averted only by a 45-billion-pound taxpayer bailout and billions more in state-backed loans.

Under a process known as Maxwellisation, anybody criticised in a British inquiry report must be given an opportunity to respond before publication.

The report, which is likely to name the likes of former RBS boss Fred Goodwin, ex-investment banking head Johnny Cameron and former prime minister Gordon Brown, former Chancellor Alistair Darling and Bank of England Governor Mervyn King, is expected to be more colourful than packed with new information.

But two independent senior corporate governance gurus have been overviewing the work of the FSA -- which will next year see its powers divided between a new unit at the Bank of England and a standalone Financial Conduct Authority -- to ensure it is neither a whitewash nor stymied by legal rows.

Former banker David Walker and lawyer Bill Knight are expected to publish their own independent review of the report, a 20-page document that could be published on Tuesday.

MP Andrew Tyrie, one of the most outspoken critics of the FSA on RBS, said in May the public deserved to know how the decisive mistakes that destroyed RBS were allowed to be made while announcing the appointment of Walker and Knight.

RBS itself is keen to move on and is hoping the report will allow it to put the sins of the past to bed.

GOVERNANCE GURUS

The FSA said in June the report would show regulators were severely deficient in their supervision of RBS after incensed politicians demanded a public account following the FSA's decision last December to clear RBS top brass of wrongdoing.

The cross-party Treasury Select Committee (TSC) of leading politicians, which Tyrie chairs, is keen to ensure the FSA's final account of what went wrong at both RBS and on its own turf is a fair and balanced summary of evidence gathered by the regulator and accountants PricewaterhouseCoopers (PwC).

Equally, the involvement of lawmakers means the FSA could hand the document to parliament for publication under Parliamentary privilege -- legal immunity which protects legislators against civil or criminal liability -- should any eleventh-hour legal objections be raised.

Once a small Scottish retail bank, RBS staged a meteoric rise to global prominence over two decades with an increasingly aggressive expansion into wholesale banking that subsequently threatened to fell the entire UK financial system.

Under the helm of Goodwin, whose authoritarian management style discouraged dissent among senior staff, RBS became a national icon -- before it became a national disgrace.

Dubbed Fred the Shred for his cost-cutting abilities, Goodwin was feted in 2002 for his abilities to integrate UK banking peer NatWest and was knighted in 2004 for services to banking, in an era of light touch regulation that celebrated financial innovation under former prime minister Brown.

But his tenure at the helm of RBS was brought to an ignominious end after RBS succeeded in its relentless and costly pursuit of ABN AMRO, only to find its Dutch peer's assets had been overly-aggressively valued -- just as the unfolding credit crisis sent valuations plummeting in late 2007 and 2008.

RBS, already struggling to secure financing for a ballooning leveraged finance and commercial real state lending business that was exposed to subprime mortgages, was forced to make UK corporate history with a 12 billion pound emergency cash call.

But with its shares in freefall, it was not enough.

In October 2008, increasingly wary corporate customers -- who had witnessed the collapse of Wall Street's Lehman Brothers under the weight of subprime U.S. mortgages a month earlier -- started pulling out deposits. As RBS stared into the financial abyss, investor confidence drained in British banks.

Brown, Bank of England Governor King and former finance minister Darling scrambled to craft a rescue involving a massive liquidity support exercise to prop up the entire industry.

The government was to take an 83 percent stake in RBS and Goodwin became one of the highest-profile banking failures of the credit crisis. But he was also one of the best paid, sent home initially with an annual pension of over 700,000 pounds -- before a public outcry forced him to slash it to 342,500 pounds.

(Reporting by Kirstin Ridley, Editing by Mark Potter)