Exclusive: Failed Bank Chiefs To Forfeit Pay

Bank directors would have to forfeit a large proportion of their income in the event of a failure of their institution under proposals to be outlined this week.

I have learned that George Osborne, the Chancellor, will publish a consultation paper on Tuesday that will point to the clawing back of directors' pay as a potential sanction for board members of failed banks.

The Financial Services Authority (FSA) has already established clawback as part of its remuneration code of practice for senior employees of banks, but I am told that the Treasury's new proposals will go further.

They will be designed to avoid a repeat of the controversy over the huge pension pot handed to Fred Goodwin, the former Royal Bank of Scotland chief executive, when he stepped down in 2008.

Mr Osborne will also begin consulting on the introduction of new criminal sanctions as well as the idea that bank executives would face automatic bans from future positions of responsibility in the industry if they had been involved with a failed lender.

The consultation will be published just over six months after the FSA released the results of an inquiry into the events leading to the rescue of RBS in the autumn of 2008.

Lord Turner, the FSA chairman, said last December that new sanctions were required "to ensure that bank executives and boards strike a different balance between risk and return than is acceptable in non-bank companies".

He raised two alternatives to deliver this, the first being a "strict liability" approach, which would make it easier for regulators to pursue enforcement actions against individuals.

Lord Turner also suggested an "automatic incentives-based approach" involving rules "which automatically ban senior executives and directors of failed banks from future positions of responsibility, or major changes to remuneration to ensure that a very significant proportion of pay is deferred and forfeited in the event of failure".

The new proposals will in a sense be published at a helpful time for Mr Osborne, who is facing intensifying calls from Labour to launch a full inquiry into the banking industry.

The Chancellor, along with David Cameron and Sir Mervyn King, Governor of the Bank of England, has argued that one would be superfluous because structural reforms to the sector are already being implemented following the review carried out last year by the Independent Commission on Banking.

This week's consultation paper will therefore become a political weapon for the Coalition as it seeks to demonstrate that it is getting tough on banks in the aftermath of a week of scandal.

Barclays' £290m fine for manipulating a key interest rate and the admission of the country's four biggest banks that they had mis-sold derivatives to small businesses have plunged the industry into its biggest crisis since the bailouts of 2008.

Incidentally, one consequence of these proposed new rules for bank directors is obvious: that fewer people in the City will want to join the boards of banks.

I suspect that that is the least of Mr Osborne's concerns right now.