Stephen Foley: United we stand, divided bankers win

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US Outlook: As one of the few world leaders who really believes in the G20 negotiations of the biggest industrialised economies, it must be pretty galling for Gordon Brown that his own Financial Services Authority has shot him in the foot even before he goes to the meeting in Pittsburgh next month.

By watering down its new rules on bankers' pay this week, the FSA has adopted a beggar-thy-neighbour approach to financial regulation that risks setting us right back on the road to financial chaos.

The FSA's proposals weren't even half radical enough in the first place, but by giving in to the big banks' protestations that they would harm the competitive position of London and drive institutions overseas, the regulator has set a dismal tone for the G20 talks.

Spreading out the bonuses of top employees over three years does not resolve the "heads I win, tails you lose" structure of remuneration in the City and on Wall Street. All employees, at every level, should be getting units in a bonus fund that vest over an entire credit cycle and which can go down in value as well as up. Only that way can their fortunes be tightly tethered to the consequences of their actions.

The FSA is absolutely right that new rules have to adopted by all major nations to have a chance of being effective, because banking will tend to migrate to the least-regulated financial centre. The G20 together can act to curtail the options for such regulatory arbitrage, but only if members show they are committed to holding the line. Instead, Mr Brown goes to Pittsburgh looking less like a statesman fighting to fix the system and more like a self-interested national leader fighting to win a bigger share of international finance.