FSA warns banks it will step in over disclosures

Seven largest lenders sign up to new code to toughen financial reporting / But Conservative calls for curb on cash bonuses to bankers face criticism

The City watchdog has threatened to step in and regulate the way high-street banks report the state of their finances, if the industry's "tough new code" fails to lift investor confidence.

The UK's seven largest lenders, including Barclays, HSBC, Lloyds and Royal Bank of Scotland, have committed to a new code for financial reporting disclosure, drawn up by the British Bankers' Association (BBA).

The BBA said banks would draw up their annual reports for 2009 according to the new guidelines "as part of their ongoing efforts to ensure disclosures continue to provide the market with high quality, decision useful information about their financial positions".

The Financial Services Authority (FSA) included the code as part of a discussion paper released yesterday.

The consultation invites comment on the BBA's draft code as well as on the introduction of a mandatory standard disclosure template for all UK banks, should the code be inadequate. A spokeswoman for the FSA said: "We will look at the annual reports when they are published, and judge whether the BBA's code is sufficient. We will decide whether it needs to be transplanted by more detailed disclosures."

Paul Chisnall, the BBA's executive director for financial policy and operations, expects the code to "provide users of financial reporting with more useful and meaningful information than one-size-fits-all FSA disclosure templates which, by their very nature, will only have limited relevance to the business models and mixes of each institution". Banks are, for instance, asked to explain why certain accounting policies are used or what assumptions are made when they estimate the value of assets and liabilities. The business review, the code adds, should "clearly tell the story of the business performance for the period under review".

The draft rules are part of the response to Lord Turner's review of a regulatory response to the global banking crisis, in March. He identified that investors' confidence in financial reporting was low, despite several overhauls to the rules since 2008. "Investors were having problems reading and understanding what they were seeing in annual reports," added the spokeswoman for the FSA. "We knew there was a need for simplification."

Paul Sharma, the FSA's director of prudential policy, said: "In the Turner review, we set out our view that the financial crisis had raised questions as to the adequacy of financial disclosure by banks throughout all the major economies and the level of confidence investors could place in their financial reports.

"The tough disclosure code published today puts UK banks further ahead of the game internationally in addressing these concerns. But when applying this code to their 2009 year-end accounts, the FSA expects firms to achieve significant improvement in the quality and comparability of disclosures." The new measures come as banks face yet more calls to curb bonus payments. Yesterday, the shadow Chancellor George Osborne urged the Treasury and the FSA "to combine forces and stop retail banks from paying out profits in significant cash bonuses, full stop". The Conservatives propose using the bonuses to to support new lending.

Mr Osborne said the bonus plan did not cover small payments to staff in local branches. It would also allow banks to award bonuses in shares rather than cash.

The BBA said: "UK banks understand that stories about high pay and bonuses cause anger and concern individuals. However, the big bonus culture is not in retail banking but investment banks. Most retail banks are weathering the economic downturn well and haven't used taxpayer money."

The UK's largest retail banks signed up to the FSA's code on remuneration last month. "They are the first banks in the world to commit themselves in full to the rules agreed at last month's G20 meeting," the BBA added.

Liam Byrne, the Chief Treasury Secretary, also rounded on Mr Osborne, saying: "We have already introduced the toughest bank remuneration policy in the world. We have stopped short of banning all bonuses for retail banks because it is unworkable, but we are ... negotiating with RBS and Lloyds on the payment of 2009 bonuses."