Banks face penalties for 'irresponsible pay'

Under Government proposals, the Financial Services Authority watchdog will report annually on whether remuneration practices are likely to lead to a build-up of risk in the financial system.

Under Government proposals, the Financial Services Authority watchdog will report annually on whether remuneration practices are likely to lead to a build-up of risk in the financial system.

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It will be able to make recommendations for action if this is thought to be the case, the White Paper on financial reform said.

Mr Darling said: "Irresponsible pay practices made banks take unnecessary risks."

The Chancellor added that banks and financial institutions need to be "better managed".

"We need a change of culture in the banks and their boardrooms, with pay practices that are focused on long-term stability and not short-term profit.

"The FSA now has powers to penalise banks if their pay policies create unnecessary risk, and are not focused on the long-term strength of their institutions," he said.

Banks should hold higher capital buffers, and will be be forced to build up bigger buffers in good times to compensate in downturns, the Chancellor said.

The Government also supports a "backstop" rule to ensure minimum capital levels are maintained and stop banks from lending too much.

But Mr Darling proposed no radical overhaul of the Tripartite Authority of the Treasury, FSA and Bank of England, which has been widely blamed for failing to stop the crisis.

The Chancellor instead proposed a Council for Financial Stability - to be chaired by himself - and including the FSA and Treasury, to examine emerging risks to the UK economy.

But shadow chancellor George Osborne called the tripartite regime "dysfunctional" and pledged to scrap it if the Conservatives won power.

Calling for the Bank of England to be given more powers, he said: "We don't need another divided committee, we don't want more divided responsibilities - we want clear lines of accountability that run all the way to Threadneedle Street."

Although there are no new powers for the Bank of England, the FSA will be given increased responsibilities to intervene with banks on a case-by-case basis.

It will also sharing formal statutory responsibility for financial stability with the Bank of England, giving it "unambiguous authority" to tackle wider systemic risks.

The FSA and the Bank of England will make financial institutions put in place emergency plans for their demise, the Chancellor said, with further consultation on regulations designed to aid the stability of the wider financial system also promised.

British Bankers' Association chief executive Angela Knight said: "We welcome moves to create better co-ordinated financial stability jointly with the FSA and the Bank of England.

"Banking is a global business and reform needs to be thoughtfully handled so moves in the UK dovetail with those overseas ensuring the UK sector remains competitive, otherwise business could move away."

On the plans to curb irresponsible pay, she added: "We are already working with the FSA on pay structures which reward individuals who contribute to long-term success and do not reward undue risk taking."