By Kate Holton
LONDON (Reuters) - Britain's media regulator gave pay-TV firm BSkyB a clean bill of health on Thursday, saying there was no evidence it was linked to a phone hacking scandal which engulfed Rupert Murdoch's News Corp, its largest shareholder.
The ruling by Ofcom, which has clashed repeatedly with BSkyB in the past, will lift a cloud that had long hung over the hugely successful group and will allow it to focus on the challenges of intensifying competition and growing economic pressures on its customers.
Ofcom concluded BSkyB was "fit and proper" to hold a broadcasting licence and avoided making the most serious ruling that News Corp should sell down some of its near 40 percent holding.
However, Ofcom heavily criticised Murdoch's son James for failing to investigate allegations of criminality at the group's newspapers properly, describing his failure to uncover the scale of the problem as "both difficult to comprehend and ill-judged".
James Murdoch is a former chief executive and chairman of BSkyB who was in charge of News Corp's British newspaper arm when the scandal exploded last year at its now defunct News of the World. He stepped down as chairman of BSkyB in April in an attempt to protect the company's reputation from being damaged, but he remains on the board.
"In our view, James Murdoch's conduct in relation to events at News Group Newspapers repeatedly fell short of the exercise of responsibility to be expected of him as CEO and chairman," it said. "To date (however), there is no evidence that Sky was directly or indirectly involved in any of the wrongdoing either admitted or alleged to have taken place at News of the World or The Sun."
Prompted by the admission that News of the World journalists had hacked into the voicemails of celebrities, politicians and crime victims, Ofcom had examined whether News Corp was an appropriate owner of BSkyB and whether James Murdoch was an appropriate director.
The ruling brings to an end one of the many outstanding concerns for the Murdoch family.
The admission of criminality at Murdoch's powerful British newspaper arm, including the detail that staff had hacked into the voicemails of a murdered schoolgirl, sent shockwaves through the political and media establishment last year.
Under pressure for his own close ties to Murdoch's media group, Prime Minister David Cameron ordered a judge-led inquiry into press standards while some journalists at Murdoch's daily Sun tabloid are still being arrested over allegations of illegal payments to public officials.
The subsequent scrutiny of the company has meant the issue of whether the Murdochs were "fit and proper" to run a British media company had become a recurring theme, after a parliamentary committee said the scandal had shown Rupert Murdoch was not fit to run a major international company.
More than 80 people have now been arrested over allegations of phone hacking, illegal payments, computer hacking and attempts to pervert the course of justice.
Two of the most high profile to be held are Rebekah Brooks, the former head of Murdoch's British newspaper arm, and Andy Coulson, a former News of the World editor who became the spokesman for Cameron's government until he resigned.
"This was, on balance, expected but it definitely removes an overhang on the stock," Liberum analyst Ian Whittaker said of Ofcom's findings. "This wasn't seen as a huge threat to the business but ... this was seen as a risk, because Ofcom and Sky don't have a great relationship."
News Corp said it welcomed the findings but disagreed with the criticism of James Murdoch, pointing out that he had helped to make the business the most successful pay-TV group in Britain with more than 10 million customers.
The group is so lucrative that News Corp tried to buy the rest of BSkyB that it did not already own for $12 billion. It halted the bid under pressure from politicians who had once openly courted Rupert Murdoch.
"As a company, we are committed to high standards of governance and we take our regulatory obligations extremely seriously," BSkyB said.
The ruling will allow BSkyB to concentrate on its operational problems. It has won customers with popular sports events and movies, but has faced increasing competition from telecom group BT in recent months. BT has won the rights to some Premier League soccer and rugby for its own sports channel.
Recession in Britain has also made potential subscribers reluctant to sign up to monthly payments.
Shares in BSkyB were up 1 percent against a wider FTSE 100 Index which was down 0.7 percent.
(Editing by Dan Lalor, Mark Potter and David Stamp)
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