Bank bonuses to be cut under new deal

(GETTY IMAGES)

The UK's biggest banks today agreed to rein in bonuses and lend £190 billion to businesses this year after hammering out a long-awaited deal with the Government.

Chancellor George Osborne unveiled details of a truce with the "big four" banks - Barclays, Royal Bank of Scotland, Lloyds Banking Group and HSBC - which will see total bonus pots lower than last year, lending to small business increased and the pay of the highest paid executives published.

He said Britain needed to move from "retribution to recovery" and called for an end to banker-bashing with the pledge, which comes after months of fraught talks with the major players, dubbed Project Merlin.

Taxpayer-backed RBS and Lloyds revealed pay packages for their top bosses following the announcement, with RBS head Stephen Hester in line for £2.04 million and outgoing Lloyds chief Eric Daniels offered a £1.45 million bonus.

Last year, Mr Hester and Mr Daniels both waived their bonuses after being awarded £1.6 million and £2.3 million respectively for 2009.

Both handouts will be in shares which can be cashed in three years, while neither bank will pay more than £2,000 in upfront cash bonuses to any staff. But there was no detail on the total bonus pool set to be distributed by big banks.

Shadow chancellor Ed Balls was scathing about the package of measures, saying Mr Osborne had "thrown in the towel" on bonuses.

He said: "For a Chancellor who talked so tough in opposition and who even yesterday continued to promise much, this is a pitiful outcome and an embarrassing climbdown."

The deal was struck despite yesterday's surprise move by Mr Osborne to increase the new bank tax by £800 million this year, which some had feared could throw discussions off course.

Under the deal, banks have pledged that total bonuses for UK-based staff will this year be lower than in 2010, while banks will be required to publish details of the pay packages not only of board members but also the five highest-paid executives outside the board.

The four banks, as well as Santander, have agreed to increase lending to small businesses by £10 billion to £76 billion and overall lending will increase from £179 billion to £190 billion.

Spanish-owned Santander - which was not part of the bonus talks - separately announced it will increase gross small business lending by 25% to nearly £4 billion this year.

And banks will contribute £1.2 billion towards the regional economy, including £200 million to capitalise a new Big Society Bank.

Mr Osborne said he recognised the anger felt by many voters towards the banks.

He told MPs: "The anger at the terrible mistakes of the banking industry and the failure of those who regulated it will long remain, and rightly so.

"But let us as a country confront this hard truth - anger and retribution will not bring one percentage point of growth or create one job.

"The anger will remain and we must never make the same mistakes again, but Britain must move from retribution to recovery."

Bosses at the top banks - as well as the relevant department heads - will see their pay linked to performance against SME (small and medium enterprises) lending targets.

The Bank of England will also publish figures against lending commitments on a quarterly basis.

Mr Osborne said the Government "reserves the right to return to the issue and take further measures" if banks fail to live up to their lending promises.

Former Barclays chief executive John Varley, who has been leading the Project Merlin negotiations on behalf of the industry, said he hoped the statement would end anger towards banks.

He said: "We hope any doubt over willingness to lend to business will be dispelled.

"We understand the public mood and we're responding to that."

However, economist Vicky Redwood at Capital Economics said Project Merlin would be "no magic fix" for lending in the UK.

The targets relate to gross lending, which does not take into account loans repaid. Net lending is seen as a more meaningful gauge for the economy.

Ms Redwood said: "We don't think that this agreement - any more than the ones that preceded it - will succeed in getting credit flowing around the economy again.

"The Government needs to consider more radical solutions, such as providing direct guarantees for bank lending to firms and households."

Mr Osborne said all four banks had pledged to pay out total bonuses that are not only lower than last year, but lower than they would otherwise have been without the agreement.

Heads of the remuneration committees of the banks will have to confirm with the Financial Services Authority (FSA) that their pay deals conform to today's commitments.

Banks are expected to reveal their individual bonus pots as they report annual profits over the next few weeks.

The sector is expected to report a combined £24 billion profits haul for 2010.

New pay disclosure rules announced today will also see Britain lead the way on global transparency, according to the Government.

As well as the 2011 transparency pledge, the Treasury is consulting on whether to make it mandatory for all large UK banks to publish the pay of the board and eight highest paid senior executives from 2012 onwards.

And for the first time, bank remuneration committees will have to sign off the 10 highest pay deals in each of their main business units.

Business Secretary Vince Cable said: "Tougher mandatory disclosure rules covering the top eight executives outside of the board will give the UK the most transparent financial regime in the world, while linking executive pay to lending gives businesses a crucial assurance that bank executives have a stake in the real economy."