TOKYO, June 14 (Reuters) - Japan's securities watchdog recommended on Friday that the banking and securities units of Mitsubishi UFJ Financial Group (MUFG) be penalised for what it said was unauthorised sharing of client information.

The Securities and Exchange Surveillance Commission (SESC) made the recommendation to the banking regulator, the Financial Services Agency (FSA), which hands out such punishments in Japan.

The recommendation, which was widely expected, followed the SESC's investigation into MUFG's banking arm, MUFG Bank, and its two brokerage ventures with Morgan Stanley.

MUFG Bank also illegally offered preferential lending rates to clients that did business with the group's two securities brokerages, the SESC said.

Japan's "firewall" regulations prohibit banks and securities companies in the same group from sharing customer data with one another without the customer's consent.

The two brokerages were established in 2010, two years after MUFG invested in Morgan Stanley at the height of the global financial crisis in 2008. MUFG owned around 23% of Morgan Stanley as of March 2024.

In 2022 the SESC indicted the brokerage unit of MUFG rival Sumitomo Mitsui Financial Group on market manipulation charges, after which the FSA ordered the unit to suspend the offending business line and improve its compliance protocols. (Reporting by Anton Bridge; Editing by David Goodman and Muralikumar Anantharaman)