Brown Pressed by Lawmakers to Extend Royal Bank Bonus Limits

By Robert Hutton

Feb. 6 (Bloomberg) -- U.K. lawmakers pressed Prime Minister Gordon Brown to extend limits on bonuses at Royal Bank of Scotland Group Plc after he signaled reluctance to cap payouts for junior traders and junior executives.

Lawmakers from all three of Britain’s main political parties are calling on banks and the government to restrict bonuses as the costs of taxpayer-financed bailouts spiral into the hundreds of billions of pounds.

“It would be an insult to struggling taxpayers across the country if the government allowed banks that we part-own to pay out big cash bonuses,” said George Osborne, the Conservative lawmaker in charge of Treasury policy. “To increase taxes on people earning 20,000 pounds ($29,000) to pay the bonuses of someone earning 2 million pounds is totally unacceptable.”

“If they have given carte blanche to bonuses, that will fuel public anger,” John McFall, a member of Brown’s Labour Party who leads a panel overseeing Treasury policy, said on BBC radio yesterday. “If there are big bonuses, there’ll be a huge outcry.”

While Brown, 57, told reporters he supported President Barack Obama “strongly” on the need to change the way bankers are rewarded, he twice refused to say he’d ban bonuses at RBS, in which the government has a majority stake.

“We agree with President Obama that a new approach is required,” Tom Hoskin, a spokesman for Brown, told journalists in London. “On the specifics, the U.S. administration have set out their position, and we have set out ours.”

Bailing Out RBS

The U.K. government is taking a 70 percent stake in RBS after the Edinburgh-based institution tapped part of the Treasury’s 50 billion-pound recapitalization fund. The bank promised to boost lending and adhere to government mandates on pay as part of the terms of the rescue.

As part of that deal, the bank also agreed to stop board- level bonuses. The question of payments to traders and junior executives is still open. When Brown was asked whether Obama’s plan would be applied in Britain, he said his government has already acted.

“We have already taken action to ensure that there are no rewards for failure,” Brown said at a press conference in London. “There are no cash bonuses being paid in these banks to the top executives.”

Unlike Obama, who has specified a maximum amount that senior executives can earn, Brown and his Business Secretary Peter Mandelson have stopped short of setting rules. Instead, they are urging company executives toward restraint.

Pay Talks

Hoskin said that the government is talking with RBS about executive pay. Brown left the impression that Obama’s plan borrowed from the one the U.K. is using.

“I strongly agree with President Obama that a new approach, the one we introduced in October, is required to reward senior banking executives,” Brown said, adding that the executives who ran RBS before the bailout had all left without bonuses or severance pay.

While the Times reported yesterday that RBS is planning “large bonuses” for thousands of traders, Hoskin said no decisions had been made, as did Linda Harper, a spokeswoman for the bank. “Any proposal will only be supported if it is fully consistent with the public interest,” Hoskin said.

Moves to restrict payouts are hampered by the contracts of bank staff, some of which guarantee compensation levels. Treasury minister Stephen Timms told BBC television that the government wouldn’t block bonus payments even though lawmakers and unions that fund the Labour Party are upset. More specific proposals would be announced in the next few weeks.

Concern Is ‘Right’

“I don’t think I’d want to rule out any payment of bonuses in any circumstances,” Timms said. “People are absolutely right to be concerned about this. In the past we have seen rewards for behavior that has made a bank’s position a precarious one.”

Under Obama’s plan, the U.S. would cap pay at $500,000 a year for top executives at banks which take a government rescue. Governments worldwide have pledged $7 trillion in bailouts, and Obama said it would be “shameful” for some to get bonuses financed by the taxpayer.

Lawmakers in Britain already were complaining about pay for bankers and the widening gap between the rich and the poor. The median wage in the U.K. last year was 24,900 pounds, less than a third of the 85,000 pounds average salary earned by investment bankers, according to Kennedy Associates, a London-based recruiting firm. Senior directors get about 125,000 pounds a year before bonuses that can be many times that sum.

‘Pernicious’ Culture

“The culture itself was very pernicious, and needs to be reformed,” Vincent Cable, Treasury spokesman for the opposition Liberal Democrats, said on Sky News “Since the government now owns the bank, it should be taking a lead in how it is reformed.”

U.K. bankers have reaped more than 31 billion pounds in bonuses over the past four years, according to the Centre for Economics and Business Research.

Mandelson sought to avoid talking about limits on pay, instead urging restraint by the bosses at RBS and other banks.

“What I would say is, please be mindful about how this looks and what public opinion will be,” he told reporters yesterday. “Of course you have got to do all you can to recruit the best people and keep the best people in place. On the other hand, the banks have got to be sensitive to public opinion.”

Brown’s spokesman refused to be drawn on whether bonus bans already in place for board-level staff at rescued banks should be applied to lower level staff.

He gave no guidance on when a decision would come, saying that a wing of the Treasury that manages the government’s stake in RBS and Lloyds Banking Group Plc is having the talks.

“As the majority shareholder with RBS, U.K. Financial Investments is in discussions on remuneration,” Hoskin said. “No decisions have yet been taken.”

To contact the reporter on this story: Robert Hutton in London at rhutton1@bloomberg.net