Bankers' 'ludicrous' contracts will be torn up

Published on Sunday 15 November 2009 21:48

CITY regulators are to be given new powers to tear up bankers' contracts if they include excessive pay and bonus deals that might threaten the stability of the financial system.

The measures come in a Financial Services Bill that is to be the centrepiece of Wednesday's Queen's Speech, which Gordon Brown said would deliver "a transformation of the way the financial sector is policed".

However, the Conservatives dismissed the proposal as "headline-chasing" and said it would do nothing to prevent multi-billion-pound bonus payments in the City this Christmas.

And the British Bankers' Association said that any legislation should not be designed in a way that might drive financial institutions away from the UK.

But Chancellor Alistair Darling said the public regarded some of the bonuses bankers had received as "ludicrous".

Mr Darling said the bill would give City watchdog the Financial Services Authority (FSA) "powers if necessary to tear up contracts that would result in payments being made that would cause instability".

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

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

They will apply to all UK banks, including Royal Bank of Scotland, Lloyds Banking Group, Barclays and HSBC, and to the UK operations of global investment banks such as Goldman Sachs.

Other provisions will require banks to hold larger capital reserves and to prepare "living wills" to ensure they can be wound up without putting the financial system at risk if they fail.

In a podcast on the Downing Street website yesterday, Mr Brown said:

"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.

But leading employment lawyer Ronnie Fox, who gave evidence to a parliamentary inquiry into the banking crisis, warned that allowing regulators to rewrite contracts would mean "abandoning the rule of law and the free market economy".

He said: "One of the marks of a civilised country is that the rule of law prevails. Contracts freely entered into are enforced by the courts."

And Angela Knight, the chief executive of the British Bankers' Association, said that the UK had gone further than many other countries in extending regulatory oversight of remuneration. "We recognise the issues and the need for culture change," she said. "But looking at legislation, we have to look at the wider context, and that is the UK as the big global centre for international banking that it is, and how it will impact there."

Shadow chief secretary to the Treasury Philip Hammond said: "The Bank of England should be put in charge and that is what we shall be pushing for as this bill goes through Parliament."

But 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."

The bill will also bar financial institutions from encouraging customers to borrow more than they can afford by sending out unrequested credit card cheques. And it would allow bank customers to join forces in US-style class actions to demand compensation for "rip-off" bank charges.

Mr Brown said that the focus of the Queen's Speech, which sets out the 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".

He pledged to reduce government borrowing "in a fair and responsible way" and said the programme would also include measures to restore faith in democratic institutions; give individuals enforceable rights over public services; provide free personal care for those in greatest need; and tackle anti-social behaviour.

"This is a difficult period for our country," said the Prime Minister.

"But Britain has a bright future, one I'm optimistic about and which I believe can be one not of austerity, but progress, and one where all the people of Britain move forward together."