Gordon Brown tried to limit the personal damage to him from the banking crisis yesterday by promising to curb bonus payments and denying he was told when City watchdogs uncovered problems at HBOS.
The Prime Minister said that, in future, banks should be able to "claw back" bonuses from staff who lose them money and the Financial Services Authority (FSA) should penalise banks who reward employees for doing "short-term deals".
The Government's plans will be set out in a White Paper published alongside the Budget on 22 April. However, the clampdown looks unlikely to spare Mr Brown's blushes over the Royal Bank of Scotland's plans to pay about £1bn in bonuses. The Government has a majority stake after pumping in £20bn but the payments look set to go ahead despite Treasury pressure to halt them. Barclays Capital, which has not received any taxpayers' money, is expected to hand bonuses to its staff.
"Any system has got to be based on long-term performance and that will have to be policed in the future by the FSA," Mr Brown told the Liaison Committee of senior MPs. "It should not be a one-way bet. In other words, if you fail, there is a clawback which is also possible within a bonus system."
His officials said later he was not proposing salary cuts in future years. Instead, shares could be held on behalf of staff and reduced in value if it became clear they had not deserved their bonus.
During a two-and-a-half hour grilling, Mr Brown insisted the Treasury was not told in 2002 when the FSA expressed concerns over HBOS's exposure to risk. It collapsed last year and merged with Lloyds TSB.
The Prime Minister insisted "no information" was given to the Treasury about the issues raised between the FSA and HBOS. "These were regarded as ordinary issues that were normally dealt with by the interaction between the FSA and HBOS," he said.
Mr Brown's defence prompted questions over the three-way regulatory system he set up as Chancellor, with responsibility shared between the FSA, Treasury and Bank of England.
He clashed with Michael Jack, a Tory member of the committee, who asked whether the regulators ever discussed "real world examples" such as HBOS. Mr Brown accused him of "magnifying the issue out of all proportion".
Last night, George Osborne, the Shadow Chancellor, said: "If it is really the case that the Chancellor was not told, it does beg the question of who was in charge of the clattering train while the biggest financial crisis in our history was brewing."
Mr Brown also insisted "the right decisions were taken" in the appointment of Sir James Crosby, the former HBOS chief executive, to the FSA. He resigned as its deputy chairman on Wednesday after allegations that he sacked a whistleblower who warned that the bank was growing too fast and taking too many risks. The Prime Minister said that when he appointed Sir James to the FSA's board as Chancellor in 2003, the Treasury was not aware the watchdog had just carried out an investigation into risk-taking at the bank as a result of complaints by the whistleblower Paul Moore.
He said Sir James was recommended by an independent panel of four people – including Sir James Sassoon, now an adviser to David Cameron – which described him as "an outstanding individual with a strong intellect".
Mr Brown insisted that problems alleged by Mr Moore were not the reason HBOS collapsed. "It was because its whole business model was wrong," he said.
He denied a claim by the Treasury Committee's Labour chairman John McFall that he was being outflanked by the US President Barack Obama, who is clamping down on bankers' salaries and tax havens. Mr McFall warned Mr Brown that the public was angry about "obscene" bonuses paid by the banks.
Defending the Government's anti-recession measures, he said 60,000 businesses had already been helped but admitted that he would like to move quicker. He insisted that the temporary cut in VAT "is working".