Banks told to comply on bonuses or lose UK banking licences in shock FSA ultimatum

Investment banks have been told that every bonus issued must comply with the regulatory guidelines – or they face having their licences to operate in Britain revoked.

Banks told to comply on bonuses or lose UK banking licences in shock FSA ultimatum Photo: PA

In an extraordinary ultimatum that has shocked some of the City's biggest companies, the Financial Services Authority (FSA) told bank bosses that 60pc of all pay must be deferred, with no exceptions, even for those whose contracts conflicting with the edict.

Many of the global players have in recent weeks made representations to the City watchdog, in particular about pre-existing employment contracts that guarantee bonuses over a year or more. But their appeals have been met with the FSA's toughest yet response.

One pay executive in a major bank told The Daily Telegraph: "The message came back that while the FSA agreed that it does not have jurisdiction over contractual law, it does have jurisdiction over issuing bank licences in London, and that we should go away and unwind the contracts."

Bankers at Merrill Lynch are among the first affected. Those with pre-existing contracts were told about the FSA's tough stance on Friday when their bonuses were agreed.

One Merrill Lynch employee said: "We thought that contracts would be immune from changes but were told by bosses that their hands were tied and there was nothing they could do, the regulator had put its foot down."

Banks that have not yet told staff about the bonus payouts are now scrambling to ensure that they are comply with the FSA rules.

Senior directors are concerned that the stance could result in the banks facing a series of legal challenges from individuals with pre-existing contracts. Headhunters say that banks including Barclays Capital and Nomura have lured star performers by offering them large guaranteed bonuses.

One headhunter said: "Many of these contracts have guarantees that 50pc of the bonus will be paid in cash. These are tricky things to unpick. But cleverly, the FSA has put the onus on the banks to unwind the contracts, rather than itself getting embroiled in a complex legal row."

Banks' senior directors have complained that the FSA's position on bonuses has shifted radically throughout the year, particularly in recent months since the Government announced its tax on bonuses and President Barack Obama unveiled his radical proposals to restrict Wall Street.

One said: "They have clearly gained confidence and they've thrown down the gauntlet. It's been very confusing and disruptive."

The FSA's position is the culmination of nearly a year of debate over how to curb huge sums paid out in remuneration by banks. In March, the regulator wrote to the bosses of the major investment institutions explaining that it was preparing a code designed to limit excessive pay in the aftermath of the financial crisis.

The consultation was followed in August by the publication of guidelines that demanded pay had to be calculated in relation to overall over risks.

The FSA issued guidelines on best practice for remuneration committees as well as recommendations for deferrals, claw-backs and a lower proportion of cash payouts.

When it found that some companies still planned to award multi-year guarantees and cash bonuses in the face of mounting political and public controversy, the regulator began to take a harder line.

In October, Lord Turner, chairman of the FSA, said he had "a range of levers'' at his disposal to block "excessive bonus payments''. "We will be talking to banks about whether their bonus pools are appropriate and if they aren't we will have a full and frank discussion with them,'' he said. At the time Lord Turner declined to detail the measures available to him.

The FSA said it would conduct spot checks to examine contracts and also threatened to force those breaching the rules to hold higher amounts of capital to compensate for the perceived extra risk. But privately bankers argued that the FSA would never be able to sweep away the rule of law.

One executive faced with dealing with the new ultimatum said: "It was pretty amazing but we actually chuckled because it's the sort of hard ball we would have played if we'd been in the FSA's shoes."