Cap on City bonuses 'unenforceable'

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The Independent Online

A cap on bonuses paid to City bankers would be "unenforceable", Chancellor of the Exchequer Alistair Darling warned today.

Proposals to curb excessive pay and bonuses are being pushed by European nations at the two-day meeting of finance ministers from the G20 group of major economies being hosted by Mr Darling in London today and tomorrow.

But the Chancellor warned that the simple cap favoured by countries such as France would not be practical, as top bankers would simply find other ways to reward themselves. And he warned of "implacable" opposition from other countries - thought to include the US.

Finance ministers of seven European countries - Sweden, France, Spain, Germany, Italy, Luxembourg and the Netherlands - today denounced the massive payouts which have been blamed for fuelling excessive risk-taking as "dangerous... indecent, cynical and unacceptable".

In a joint article for Swedish newspaper Dagens Nyheter, the ministers said that bonuses "should be paid out over a number of years and should mirror the individual's and the bank's actual performance over time".

Their comments follow yesterday's joint letter from Prime Minister Gordon Brown, French President Nicolas Sarkozy and German Chancellor Angela Merkel, floating means of restraining bonuses, such as limiting them to a proportion of a bank's overall profits or introducing "clawback" mechanisms if deals go wrong over a longer period of time.

The US has given a lukewarm reception to proposals for pay restraint, giving greater weight to the need for measures to increase banks' capital reserves.

Following bilateral talks with US Treasury Secretary Tim Geithner as the summit kicked off today, Mr Darling warned that to be effective, any measures need to be "global in scope and practical in action". Unanimous agreement is needed around the world, because of the multinational nature of the modern banking system, he said.

Asked about a cap, he told Sky News: "I think it is unenforceable.

"You can have a cap on a bonus, but if somebody really wanted to get around it, they would just raise their basic salary or arrange for money to be paid in some other way

"We have got enough experience from countries around the world of what happens with pay policies, especially with people at the top. They are very good at finding a way round it."

Instead, Mr Darling said ministers should focus on improving the regulatory system to prevent "irresponsible" pay structures and use capital-holding requirements to force banks to retain profits rather than hand them out in "lavish" bonuses.

As the summit began, the International Monetary Fund delivered a positive judgment on developments in the world economy, revising down its prediction for the fall in global GDP in 2009 from 1.4 per cent to 1.3 per cent and upgrading its forecast for 2010 growth from 2.5 per cent to 2.9 per cent.

But it saw most of the improvement occurring in eurozone countries and Japan, increasing its forecast of the fall in UK GDP for 2009 from 4.2 per cent to 4.5 per cent.

Mr Darling said the IMF figures reflected a growing consensus around his own Budget prediction that the UK and world economies would return to growth around the turn of the year.

But Conservative economic spokesman Philip Hammond said: "Today yet another international forecaster has said that while Britain's prospects for this year have got worse, the rest of the world has got better. So much for Gordon Brown's claims that Britain is 'better prepared' or that his actions have helped get us through the recession.

"Thankfully the IMF expects that growth will resume next year, as we do. We will be left with a legacy of rising debt which this Government refuses to recognise."

Indications that countries like France and Germany may already have moved out of recession should be treated "cautiously", said Mr Darling, warning that there was still a great deal of uncertainty in the global economy.

Britain is pushing hard at this weekend's gathering to ensure that G20 countries stick to the fiscal stimulus packages they signed up to at the London Summit in April.

The Treasury fears that moving too swiftly towards an "exit strategy" of reining in state spending and increasing taxes to balance the books could endanger the recovery from recession.

Mr Darling said he was "not shifting" from his forecast of a return to growth in 2010: "I do think our economy will recover and see growth at the turn of the year and it will do so because of all the action we have taken - bitterly opposed by the Tories. I think we did the right thing and I think our judgment will be borne out."

Talks at tonight's working dinner will focus on the role of the IMF and other international institutions in supporting countries struggling as a result of the downturn.

Tomorrow will see discussions on the progress made since April in reviving national economies through fiscal stimulus and further measures to be taken ahead of the summit of G20 leaders in Pittsburgh later this month.

Britain also wants agreement on action against tax havens, with a target date of March 2010 for the start of sanctions against financial centres which refuse to adopt agreed standards of transparency.