Page last updated at 14:42 GMT, Saturday, 15 August 2009 15:42 UK

Bankers defend culture of bonuses

Angela Knight: "Banks have not paid bonuses"

The banking industry has hit back at calls from the Tory party to clamp down further on big bonuses in banks.

Shadow chancellor George Osborne said handing out large pay awards was "unacceptable" for any bank which was backed by state guarantees.

The British Bankers Association (BBA) said pay rules were already "more stringent" than in any other country.

The Financial Services Authority (FSA) said it was not a "moral regulator" and could only act using the powers it had.

Angela Knight, chief executive of the BBA, said the industry only paid bonuses "according to the requirements placed upon it by the authorities".

Of course you have to take risks, but sensible, proper, practical risks
Angela Knight, British Bankers Association

She told BBC News that she understood the concerns but banking was not the only sector to pay bonuses.

"The question is. 'Why are they paid? Is it for good performance?' Well, that is the way bonuses should be and are paid.

"What is essential is to reward the right sort of behaviour and not ones that will cause problems."

She said the sector did not promote excessive risk taking, but some element of risk would still be present.

"Risk and remuneration must go closely together - of course you have to take risks, but sensible, proper, practical risks.

"But if you have a structure that promotes excessive risk taking - that is not correct."

Mr Osborne claimed that banks needed to "live in the real world" and said that a Conservative government would seek to completely stop the payment of large bonuses.

The FSA, as banking regulator, should have vetoed bonuses being paid out this year, he said.

If more is needed by politicians then governments need to act through a further act of parliament
FSA spokesperson

He said the FSA should be scrapped and power handed over to the Bank of England.

"The regulator has to have the power to tell banks to stop doing things that they think are detrimental to the health not just of that bank, but the broader banking system. And I think they should exercise that power," he added.

But a spokesman for the FSA said it could only operate within the powers given to it by law.

"If more is needed by politicians then governments need to act through a further act of parliament.

"We are not a moral regulator. If there's an issue, MPs should change the existing law or the mandate given to the regulator."

He said that following a five-month public consultation on bankers' pay earlier in the year, the FSA announced that pay deals were to be linked more closely with long-term profitability.

'Excessive risks'

It said bonuses should not be guaranteed for more than a year, and that senior employees should have their bonuses spread over three years.

Mr Osborne argued that state guarantees on lending were meant to help stabilise the system, not reward bankers.

"It is totally unacceptable for bank bonuses to be paid on the back of taxpayer guarantees," he told the Guardian. "It must stop."

Ms Knight said the finance industry was not the only factor in the economic crisis.

"It is a political issue because of the taxpayers involvement - there are many more problems out there to solver other than remuneration.

"The economy was in decline before the banking crisis started and we need to work together to restore it to full health".

She added that the industry is paying back the public money and doing all it can to restore confidence in the system.

Business Secretary Lord Mandelson criticised the comments from the shadow chancellor.

"George Osborne is a crowd pleaser. He and the Tories had nothing to say on the subject of bonuses to FSA during their consultation on the subject but because he was being interviewed by the Guardian, he says what he thinks Guardian readers want to hear.

"The rewards (for bankers) need to be linked to risks. The problem is when excessive rewards start driving excessive risk taking."

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