We need our big bonuses or London will suffer, say bankers

Tories accuse Chancellor of 'complete confusion' over policy on remuneration

By James Thompson

Monday, 17 August 2009

London's reputation as a global financial centre could be devastated if the Government changes the law to restrict the ability of banks to pay bonuses, it was claimed yesterday. Such a restriction would damage the City if similar laws were not implemented across the world, the British Bankers' Association (BBA) said.

At the weekend, the Chancellor, Alistair Darling, said he was ready to introduce new legislation governing the way the banks pay multi-millionpound bonuses. Mr Darling said: "If we need to change the law and toughen things up. We can do that."

Under the Treasury's plans, new laws would give the Financial Services Authority power to control bonuses at all British banks, not just at those institutions receiving state support.

But a spokesman for the BBA said: "The next move towards any potential legislation would have to be done at an international level, otherwise you run the risk of [investment] moving from one financial centre to another."

While there was scepticism about whether such a plan would come to fruition, it is understood the Government is serious about the measure.

Mr Darling's comments came in a weekend of fresh revelations about big bonuses in the City. Barclays Capital, the high street bank's investment banking arm, reportedly offered five investment bankers a bonus package worth a total of £30m. It also emerged that in the peak bonus season between December and April, British banks paid out £7.6bn in bonuses, although this was 40 per cent lower than the £13.2bn handed over last year.

A growing army of taxpayers are angry that lenders appear to have already returned to a culture of excessive payouts.

The Conservative Party accused the Chancellor of spreading confusion with his comments about the need for legislation. George Osborne, the Shadow Chancellor, said: "The Government posturing on bonuses reveals their complete confusion. One moment the Chancellor says he can't legislate and the very next moment he says he will.

"They promise tough action this week but only last week allowed the FSA to pull its punches."

Paul Kenny, the general-secretary of the GMB union, said: "The notion that these bonuses are actually earned by high-flying, exceptionally talented banker types is a myth. These rewards bear no relationship to the jobs they actually do."

Mr Darling said he understood the anger felt by taxpayers who were now indirectly funding bailed-out lenders. He adding: "The public is rightly concerned because the taxpayer has had to stand behind a number of these banks and the whole banking system in effect. So people want to make sure we don't get ourselves into this situation again. The FSA code is only part of our approach.

"I'm quite clear some of the problems we have today were caused by the fact some traders were incentivised to take risks which neither they nor their bosses fully understood."

The Financial Services Authority has in the past been criticised for failing to tackle excessive bonuses.

Last week, it issued a new code of practice which said pay awards should be aligned more closely with the long-term profitability of banks, and that bonuses should not be guaranteed for more than a year.

However, it has since emerged that the new code of practice on pay will apply to only 26 banks operating in the City, down from the original 45.