Gordon Brown says banks will not 'reward failure'

(David Moir/PA)

Gordon Brown says that banks should not "reward failure"

Gordon Brown insisted today that there must be “no rewards for failure” in Britain’s banks.

The Prime Minister's comments came despite reports that big banks that were bailed out with billions of pounds of taxpayer money are to pay more than £1 billion in bonuses to senior staff.

Speaking to an audience of economists in London, Mr Brown said that Britain was leading the way "in sweeping aside the old short-term bonus culture of the past and replacing it first of all with a determination that there are no rewards for failure and secondly that there are rewards only for long-term success”.

Mr Brown said that the policy not to reward failure would be pursued "aggressively", so that banks in which the state now holds a majority stake would pay no bonuses to board members and no dividends to shareholders this year.

He added: “I believe, as a society, we should support hard work, effort, enterprise and responsible risk-taking. We should not in any way condone, but should punish, irresponsible and excessive risk-taking.”

The Times reported this morning that the bankers recruited by the Treasury to manage the Government's £37 billion bank bailout are themselves in line for bonuses.

It added that UK Financial Investments Ltd (UKFI), the Treasury-run body created by Alistair Darling, the Chancellor, to manage the state's stake in the banks, is set to approve more than £1 billion in bonuses for banks that received bailout funding.

The Royal Bank of Scotland, which is 70 per cent owned by the state, wants to pay staff close to £1 billion in bonuses.

UKFI is also being asked to approve bonus payments in Lloyds Banking Group, another partially nationalised lender.

Mr Darling acknowledged public anger over bonuses yesterday and announced a review of the way that banks are run.

However, he said there was “nothing wrong with a bonus scheme that rewards success”.

George Osborne, the Shadow Chancellor, called for a fundamental change to bankers’ pay.

“The party is over for the banks," he said. "You can’t go on paying yourselves 20 times what a heart surgeon earns. That whole culture has to come to an end. I think the bankers, and indeed the Government, have to understand you can’t just reflate the balloon that burst,” he said.

The row has thrown the spotlight on to the arm’s-length body set up last November that must now decide how much banks can pay out in bonuses.

Since its creation UKFI has hired around a dozen senior bankers and other financial experts.

They include John Kingman, a senior Treasury official, John Crompton, formerly managing director of Merrill Lynch, and the banking analyst Tim Sykes. The Government has so far refused to say what UKFI’s staff are paid, but a spokesman yesterday admitted it intends to run a bonus scheme. The full details had yet to be finalised, he said.

Sources close to UKFI defended the proposed incentive payments. “If these guys sell RBS at a large profit for the taxpayer in a couple of years, who’s going to begrudge them a bonus?” said one.

Mr Darling was yesterday forced to defend Glen Moreno, UKFI acting chairman, after it was reported that he was a former trustee of Liechtenstein Global Trust, which has been at the centre of an international investigation into alleged tax evasion.

Barclays, which has taken advantage of government bailout schemes but has not accepted rescue capital from taxpayers, will today announce that bonuses for 2008 will be down by about half on average. Barclays Capital, its investment banking arm, is expected to pay out £600 million, while there will be additional bonuses for people in the retail and commercial arm of the bank.

French banks yesterday agreed a code of ethics to limit bonuses and peg them to long-term success rather than short-term profits. The code, the first of its kind in the world, comes after President Sarkozy blamed bankers for the global economic catastrophe.

UKFI staff will not be the first state bankers to be paid incentive payments. Bonuses worth 10 per cent of salaries were paid to Northern Rock staff last month because the lender hit targets to repay loans.