The City’s watchdog has been accused of “capitulation” after watering down key proposals to rein in bank pay.
The Financial Services Authority (FSA) dropped previous proposals on deferring bonuses as well as linking payouts to the bank’s overall performance, relegating them to guidance.
Liberal Democrat Treasury spokesman Vince Cable said the FSA had shunned the chance to assert its authority and “capitulated at the first sign of dissent”.
The recommendations in the FSA’s earlier consultation in March were deemed “too prescriptive” by the banks and trade bodies which replied.
Respondents said the proposals went further than those put forward by other regulators and “would have adverse implications for the UK as a financial centre”.
Mr Cable added: “The banks seem to think it’s business as usual and today it looks as though the FSA thinks this too.
“These watered down plans send out entirely the wrong message to an industry which is already forgetting that just a matter of months ago it had to come with its begging bowl to the taxpayer.”
The FSA said the new code of practice, which comes into force next year, linked pay policies to risk. The regulator said it expected firms not to offer guaranteed multi-year bonuses and also wants two-thirds of bonuses for senior staff to be spread over three years.
But how much attention will be paid by banks who have been on an aggressive hiring spree and enjoyed bumper investment banking profits so far this year remains to be seen, especially as the Conservatives plan to scrap the FSA if they win power.
The British Bankers’ Association said the code was the “right way forward”.
“Too often in the past, business has moved out of the UK as in various ways our country has become uncompetitive,” chief executive Angela Knight said.
The FSA’s changes to the draft also reduce the scope of the banks covered by the rules from 47 to 26, by excluding overseas firms unless they include UK banks holding £1 billion in capital or more.
Peter Montagnon, the director of investment affairs at shareholder lobby group the ABI, added: “The FSA has stuck to its principle of linking remuneration to risk, while making the code less prescriptive and narrowing the scope of the organisations covered.
“The new version is much more likely to deliver the desired outcome without excessive compliance burdens.”
The FSA’s policy document said there was “general opposition” to the consultation document’s idea that it would be good practice for at least two-thirds of bonuses to be deferred, although it has retained the figure in its guidance.
Banks pointed out that increased deferral reduces the perceived value of a bonus to the individual, so total packages could go up, the FSA added.
The FSA previously said it wanted firms to operate a “fully flexible” bonus policy. It said it would treat the ability of banks not to pay bonuses in a year in which the firm makes a loss as evidence of this.
But the banks said “losses should not necessarily result in zero bonuses” as firms want to reward those who were not responsible for the loss, such as junior staff, or those starting new businesses which are not yet profitable.
Firms will be expected to provide the FSA with a statement on pay policy by the end of October, which will be signed off by remuneration committees to enable the FSA to check compliance with the code.