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Who’s afraid of the Financial Services Authority? Fewer and fewer people, now the opposition Conservatives have pledged to abolish it. But the latest “Dear CEO” letter written by Hector Sants, the FSA’s chief executive, shows the regulator can still bare its teeth. It gives UK banks until October to demonstrate their remuneration policies are compatible with the regulator’s code of conduct. The FSA will then open a dialogue with remuneration committee chairmen to discuss any concerns. The implicit threat is that it could force banks to renegotiate contracts and, possibly, impose higher capital requirements.

Short-term guaranteed bonuses, although an oxymoron, are common and relatively harmless: they are often the only way to hire staff mid-year. For banks such as Barclays rapidly expanding their investment banking operations, such guarantees are hardly unusual. The FSA’s real target is long-term guaranteed bonuses. Contracts guaranteeing variable pay for several years, in flagrant breach of the code’s principle of pay for performance, are rarer. The FSA is right to insist it will not allow any grandfathering of contracts entered into after the publication of its consultation paper on remuneration on March 18.

Reining in Royal Bank of Scotland will be particularly hard because of the way the government is conflicted. If bankers critical to the profitability of important business units leave for rivals, the government’s chances of getting RBS off its books and snaring privatisation receipts will be harmed. UK Financial Investments, custodian of the government’s stake, has accepted that RBS must offer market rates if it is to stop haemorrhaging talent. If that means honouring legally binding guaranteed bonuses, as RBS said it would in February, so be it. Mr Sants may find his hands are tied by a desperate Treasury as much as by incorrigible bankers.

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