Osborne raises heat on bank bonuses

The Tories launched a fresh offensive against bank bonuses on Tuesday, signalling their willingness to fight the election promising much tougher curbs on perceived City excesses.

In a wide-ranging speech George Osborne, the shadow chancellor, also attacked the government’s “absence” from the Brussels debate on contentious proposals to regulate hedge funds. The criticism will infuriate Labour, which accuses the opposition party of jeopardising Britain’s international influence through its Euro­sceptic stance.

Mr Osborne used a speech to the Association of British Insurers to send what one aide called a “shot across the bows” of the banks. He argued that all UK banks should avoid paying big bonuses, even if they did not have partial state ownership, in recognition of the taxpayer’s role in bailing out the sector.

“Some banks are now making big profits again from higher margins, underpinned by taxpayer guarantees. It would be a huge mistake if they pay out huge bonuses this year end on the back of these government-supported profits,” he said. “The banks should be using their profits to rebuild their balance sheets, not to hand out huge bonuses while the rest of the economy picks up the pieces for the follies of finance.”

The Conservatives in­sisted the party’s renewed assault on City bonuses went beyond political rhetoric. The party supports moves to link the Financial Services Authority’s regulatory curbs on the banks’ capital requirements to the lenders’ remuneration policies. A Conservative government could go further still. “We reserve the right to come back to the issue if that FSA requirement proves not to be sufficient,” a Tory insider told the Financial Times.

The warning of a potential future clampdown is unlikely to improve the Tories’ strained relations with the City.

UK banks with investment banking divisions have been reporting strong results in the first quarter, partly off the back of trading government debt, and are set to pay bonuses to staff.

Royal Bank of Scotland, which is 70 per cent taxpayer-owned, complained last month that it was losing hundreds of staff from its global banking and markets division because of restrictions on bonuses. Both Lloyds Banking Group and RBS have agreed that staff bonuses will be paid in subordinated debt, will have to be held for three years and are subject to “clawback” if the bank does badly. Barclays, which has taken no government money, has no such restrictions.

Mr Osborne sought to offset his tough message to the banks with a pledge of support for a “more responsible City”. The need for “better regulation” should not become a Trojan horse for the creation of badly designed new controls that would “needlessly undermine London’s competitive advantage”, he said. Mr Osborne cited as a “classic example” of this risk the draft European directive on alternative investment fund managers, which some of Britain’s hedge funds have warned could force them to leave the country.

The shadow chancellor suggested that Labour’s political turmoil was damaging its ability to fight the City’s corner on such measures. “The evidence is that Treasury ministers are currently absent from the European debate,” he said – an assertion strongly denied by the government.