Page last updated at 20:56 GMT, Friday, 4 September 2009 21:56 UK

France urges UK change on bonuses

Christine Lagarde
France is pushing strongly for mandatory pay caps

French Finance Minister Christine Lagarde has urged the UK to change the rules governing bank bonuses.

She told BBC's Newsnight programme that nobody wanted a recurrence of the crisis that occurred 12 months ago.

UK Chancellor Alistair Darling has said the French plan, for mandatory caps on bonuses, is "unworkable".

Banker compensation will be high on the agenda of finance ministers from the Group of 20 richest nations (G20), who are meeting in London.

'Horrible'

"What happened 12 months ago was just horrible for our societies, it was horrible for our economies, and we are still suffering as a result," Mrs Lagarde said.

I would be surprised that the excellent common law system of the UK does not find ways to make the collective determination enforceable
Christine Lagarde, French finance minister

"Nobody wants this thing to happen again and if we want to avoid a recurrence of the crisis, we need to change the rules."

France is proposing a series of mandatory caps on bonuses - which the head of the Eurogroup of eurozone finance ministers, Luxembourg's Jean-Claude Juncker, said he "totally supported".

Mr Darling told the BBC that the UK favoured measures designed to make sure banks had higher capital reserves and were geared more to long-term growth.

But the UK and US have so far been reluctant to go as far as France is putting a limit on bankers' pay.

"Frankly I would be surprised that the excellent common law system of the UK does not find ways to make the collective determination enforceable," Mrs Lagarde said.

"Everybody knows that the compensation of someone is a driver for that person's behaviour so we need to look at compensation."

A meeting of the heads of the G20 governments will take place in Pittsburgh later this month.

Joint letter

On Thursday, UK Prime Minister Gordon Brown said in a joint letter with the heads of the French and German governments that they must explore ways to "limit" bonuses.

Darling: "We want to encourage long term growth and commitment"

"We should explore ways to limit total variable remuneration in a bank either to a certain proportion of total compensation or the bank's revenues and/or profits," they said.

"The abatement of financial tensions has led some financial institutions to imagine they can return to the same modes of action prevalent before the crisis. This is not an option," the letter added.

That appeared to contrast with previous comments from Mr Brown that he did not favour capping bonuses.

His comments suggested that he preferred finding mechanisms where banks could "claw back" bonuses if the bank later performed poorly.

Bonus proposals

Mr Darling, in an interview with the BBC's economics editor, Stephanie Flanders, denied that the letter was a U-turn by the UK.

He said that the prime minister was merely showing the UK was prepared to work with other countries.

And he said he thought the US, where there has also been a backlash over bonuses, would take the same view as the UK government.

If you cap bankers' bonuses, banks will either "jack up" their basic salary or go elsewhere, he said.

"For this to work, you have to get global agreement because all these banks are multinational," he said.

"Inevitably, different countries will present different solutions," Mr Darling said.

Shadow chancellor George Osborne said that Labour's "confusion" about its economic policy was threatening the economy.

"Yesterday Gordon Brown signed a letter promising to explore bonus caps, and today Alistair Darling says those caps are unworkable," he said.

"It's further evidence of the growing tension between Number 10 and Number 11 that could do so much damage to our economic recovery."



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