James Moore: FSA's plan is not as good as it appears

Outlook: Hector Sants could scarcely have garnered more publicity for himself this week had he dressed up in a Fathers for Justice-style Spider-Man suit and stood at the top of Canary Wharf with a banner and megaphone, blaring: "Look at me, look at me".

With the Sword of Damocles hanging over the Financial Services Authority in the form of the Tories' plans to axe it (in no small part because of the widespread criticism of the way the regulator sat on its hands while the banks sowed the seeds of their own downfall) he is desperate to prove that he is doing something.

Hence the attention on bankers' bonuses. It was hardly worth him publishing yesterday's "final" proposals for a shake-up in the way these are paid, given that he had more or less told everyone during the preceding week what was in the document (the fines for regulated firms acting in the same way would be eye-popping).

It is also less than clear that what he has offered up will do much good. For a start, it has been significantly watered down thanks to a furious lobbying campaign on the part of the banks, and a recognition that if Britain goes it alone, they will simply move their trading floors elsewhere.

There is still a ban on multi-year guaranteed bonuses, but the banks have already covered that one by offering substantial rises to the basic salaries of their "stars". Deferring bonuses? Well it sounds like a bright idea – there is clear evidence that traders are inclined to take big risks with their employers' money in the run-up to bonus decisions in the hopes of a big pay-off for themselves. Deferring their gains might help to reduce the pain that is caused when these tactics go wrong. But, as usual, the FSA has given no guidance about how this will work in practice, leaving it up to the banks to make it up as they go along – and that's where the problems start.

What should happen, for example, to the deferred part of a bonus when a banker is made redundant? This is a rather important question because it is not just the way traders are paid that has caused problems, but the way they are hired and sometimes fired.

During boom times it is not so hard for traders to make money with the benefit of a little bit of luck. Typically it is all about momentum, riding the bull into the sky, and it's not uncommon for traders to get by like this for a year, or two, or three.

However, by the time it all goes wrong and they start to lose (and when they lose, they lose big), the bonuses have been paid. They are usually quietly made redundant (it is very rare for them to be fired) and packed off with glowing references because their employers don't like the idea of admitting they hired a dud. Also, they are probably not averse to the possibility of said dud making a horlicks of it at the bank down the road, which is all too often what happens.

Given that this notional trader has not done anything wrong – he (and it usually is a he) has simply been made redundant for not being very good, you can hardly then not pay the deferred part of the bonus he will have been promised under the new system when he was doing well. Were the bank to attempt to do this, it could simply find itself fuelling another set of bonuses – those paid to employment lawyers.

So a juicy compensation package will probably be hammered out and the dud trader will be able to repeat the process until he has made so much money that he can live well for the rest of his life. There is nothing within the FSA's "principles" to stop this happening, so it will probably continue. But let's not worry, eh? The FSA has created a big noise, made it look as if it is doing something and its boss has appeared on the telly.

As for the 19 companies which have been removed from the scope of the new regulations because, apparently, they are smaller and pose less "systemic risk", their HR directors must now be rubbing their hands with glee.

Here is a way, some will surely be thinking, of making sure that we are not so small anymore. Remember, these are banks after all. Give them a half – no a quarter – of an inch...