FSA warns on bank bonuses

Banks should consider their wider responsibility to society and "soft" government guarantees that have helped to support them before setting this year's bonus payouts, the financial regulator said on Monday.

As bonuses for bankers look set to jump in 2009, the comments were seen as a warning to Barclays and HSBC, who have avoided direct government help, as well as part-nationalised banks like Royal Bank of Scotland.

"There is this wider question as to whether, given banks are arguably still in receipt of some form of underpinning, soft guarantee, they should recognise this in their bonus policies" Financial Services Authority (FSA) Chief Executive Hector Sants told BBC radio.

Politicians also stepped up their warnings that banks should show restraint amid talk that a "windfall tax" could be considered if the industry fails to keep pay in check.

"The banks have a real challenge to prove that they are willing to behave in a socially and morally acceptable way and that requires them to justify their decisions about bonuses both to their shareholders and to their customers" Treasury Minister Paul Myners said on Monday.

He told Sky News that a windfall tax on profitability was a matter for Chancellor Alistair Darling to address in his pre-budget review next month.

BONUS ROW

Leading G20 countries agreed to compensation reforms last month, which include subjecting awards to clawback and deferral. 

The country's top banks have signed up to the agreement, but there is no cap on payouts and after buoyant investment banking activity so far this year there are expected to be multi-million pound payouts for many top bankers.

U.S. bank Goldman Sachs last week reignited the debate about excessive compensation after setting aside $5.4 billion (3.3 billion pounds) for pay in the third quarter alone. It is on course to pay out $20 billion this year, infuriating critics so soon after repaying $10 billion in taxpayer bailout funds.

Barclays Capital, the investment bank arm of Barclays, is expected to post record profits for 2009 after its takeover of the U.S. arm of Lehman Brothers. It is due to unveil a review of bonus policy early next year after an internal assessment by its senior independent director, Richard Broadbent.

HSBC's investment bank also had a record first half, while RBS is offering lucrative packages to attract and retain staff at its investment bank, industry sources say.

All three are due to give trading updates next month, although decisions on bonuses will not be made until full year results in February and early March.

The FSA's Sants said the banks should recognise their wider responsibility to society.

"They should recognise what has happened in the last few years and they should recognise that without the interventions made by government and taxpayers around the world, the situation they would be in now would be far worse" he said.

"I think it would be reasonable for them to take that into account as they go into their bonus rounds."

But banks could be disadvantaged if Britain imposes tougher bonus requirements than regulators in other countries, the chairman of Barclays warned. 

"There is the real risk of regulatory arbitrage" Marcus Agius said in a report in the Financial Times on Monday.

"This is a global financial system. It is fungible. So I am very concerned there should be a level playing field."