Banks get warning on big bonuses.

Byline: Andrew Mernin

THE head of the City watchdog warned banks against a return to the days of risk-fuelled bonuses yesterday as the regulator prepares to lay out new strictures on pay.

The Financial Services Authority (FSA) will publish a code of practice for banks on salary and bonus policies this week following a consultation launched in February.

It follows fears that banks could resume the pay practices which were a key factor in undermining the financial system and tipping the economy into recession.

So far this year many banks have been hiring aggressively amid a boom in lucrative investment banking - in some cases tempting recruits with guaranteed bonuses stretching over many years. This practice is frowned on by the watchdog. FSA chief executive Hector Sants told the BBC's Andrew Marr show: "We have made absolutely clear that we do not expect multi-year guarantees to be paid."

He said: "We are publishing our code this week which will clearly lay out the bounds of how these bonuses are distributed."

Banks will be obliged to "clearly articulate" their pay and bonus policies under the code and those who do not could be forced to hold more capital on their balance sheets, he said.

"Our job is to make sure that banks in their bonus policies, their compensation policies, do not put these banks at risk as in the past," Mr Sants said.

But he added that while bank pay policies "in aggregate" came under the FSA's remit, the question of individual payments to staff was "one primarily for the shareholders".