BRITISH PRIME Minister Gordon Brown is to give bank regulators new powers to tear up bonus contracts deemed “reckless” and punish individuals or firms involved in financial wrongdoing.

The move forms part of a broader effort to strengthen the hand of the Financial Services Authority (FSA), the leading regulator in Britain, to make it a “credible deterrent” against financial crime and excess in the City.

Mr Brown’s proposals will be announced in the Queen’s Speech on Wednesday, which sets the legislative agenda for the months left before next year’s general election.

Under the financial services Bill, the FSA will be given additional powers to punish those who fail to seek the necessary authorisation from the City regulator or engage in wrongdoing.

It will include allowing the FSA to punish firms by suspending them from engaging in particular business lines, a power often used with success in Japan. Currently, the FSA can pull authorisations only for risk reasons. But the most politically charged element of the Bill will be awarding regulators the clout to cancel individual bankers’ contracts, if they are deemed to reward reckless risk taking.

The power supplements the FSA’s ability to raise the capital requirements of banks that breach its remuneration code.

However, this power will apply only to new contracts and it will cover the type of incentives offered, rather than the size of the bonus paid. Lord Myners, the City minister, said: “We are going to make it very clear that contracts which contain bonus clauses which will add to risk or contracts which guarantee bonuses for several years are no longer acceptable and, if those contracts are written, they will be voided under law.”

The Bill would also enhance the FSA’s ability to hold executives personally responsible for misconduct, by giving the regulator four years rather than two to bring cases against individuals.

The new powers are intended to help the FSA bring more criminal cases and impose tougher penalties on the regulatory side.

Margaret Cole, the FSA enforcement director, welcomed both the new immunity law and the government’s proposals to give the FSA additional powers, saying they helped to give her division a “full tool kit”.

“We have really changed the landscape in this agency about the use of enforcement,” said Ms Cole. “Everyone is now keen to use it to send a message.”

The changes come against a global backdrop of increased prosecution of white-collar crime, with a focus on insider dealing. – (Copyright The Financial Times 2009)