Brown pledges curbs on bonuses

new powers to city regulators form centrepiece of Queen’s speech on Wednesday

By Andrew Woodcock

Published:

City regulators are to be given new powers to tear up bankers’ contracts if they include excessive pay and bonus deals which might threaten the stability of the financial system, it was revealed yesterday.

The measures will be included in a Financial Services Bill forming the centrepiece of Wednesday’s Queen’s Speech, which Gordon Brown said would deliver “a transformation of the way the financial sector is policed”.

Tories dismissed the proposal as “headline-chasing” which would do nothing to prevent a multibillion round of bonus payments in the City this Christmas.

The British Bankers’ Association warned that any legislation should not be designed in a way that might drive financial institutions to relocate away from the UK.

Chancellor Alistair Darling said that bankers must start seeing themselves as “fellow citizens” and said the public regarded some of the bonuses they had received as “ludicrous”.

Mr Darling told a Sunday newspaper that his bill would give the Financial Services Authority “powers, if necessary, to tear up contracts that would result in payments being made that would cause instability”.

The legislation will enable the authority to require banks to renegotiate remuneration packages which breach its pay code, and fine those which continue to offer unjustifiable sums.

The new rules will come into effect next year if the bill completes its passage through parliament before the election – which must be held by June 3 – and will affect all new contracts.

They will apply to all UK banks, including RBS, Lloyds, Barclays and HSBC as well as the UK operations of global investment banks like Goldman Sachs.

Other provisions will require banks to hold larger capital reserves and to prepare so-called “living wills” to ensure they can be wound up in the case of failure without putting the entire financial system at risk.

In a podcast on the Downing Street website, Mr Brown said: “We will ensure that the banking crisis we have experienced over the last two years should never again come at a cost to the taxpayer.

“This means a transformation of the way the financial sector is policed, with banks themselves and not the taxpayer made to pay for bank failings.”

City Minister Lord Myners said that the measures would “de-risk” the banking system and suggested that senior banking figures were “very keen” for the government to exercise control over the bonus culture.

Leading employment lawyer Ronnie Fox warned that allowing regulators to rewrite contracts would mean “abandoning the rule of law and the free market economy”.

“One of the marks of a civilised country is that the rule of law prevails,” said Mr Fox. “Contracts freely entered into are enforced by the courts.

“Freedom of contract is a basic principle of English law. Only in exceptional circumstances should government interfere with freedom of contract.”

Shadow chief secretary to the Treasury Philip Hammond said: “What this legislation should be doing is fixing the broken system of financial regulation. The Bank of England should be put in charge and that is what we shall be pushing for as this bill goes through parliament.”

Liberal Democrat Treasury spokesman Vince Cable said: “If bankers put the country at risk through their behaviour, they should be struck off in the same way that doctors are struck off in cases of professional misconduct.”

Mr Brown said that the focus of the Queen’s Speech, which sets out his government’s programme for the remaining months of this parliament, would be “the return to economic growth and forging a stronger, fairer Britain for the many, not the few”.