Aug. 12 (Bloomberg) -- Britain’s financial regulator published rules to rein in risky banker bonuses, while weakening provisions that would have forced the deferral of some awards.

Banks must comply with a Financial Services Authority code that tries to stop bankers from getting bonuses at high multiples of their salary, or bonuses guaranteed for more than a year, the regulator said today. The rules apply to about 26 banks after non-British lenders were largely exempted. The FSA said concerns about competitiveness prompted some changes.

“These watered down plans send out entirely the wrong message to an industry which is already forgetting that just a matter of months ago it had to come with its begging bowl to the taxpayer,” said Vince Cable, the economic spokesman for the opposition Liberal Democrats. “The regulator had a real opportunity to assert its authority, but at the first sign of dissent from the banks it has capitulated.”

Investors, unions and lawmakers attacked the compensation given to bankers after bonuses were blamed for increasing the risks that led to the credit crisis. Royal Bank of Scotland Group Plc Chief Executive Officer Stephen Hester last month agreed to modify his 9.74 million-pound ($16 million) package. Peter Cummings, the former head of the HBOS Plc banking unit that had an 11-billion pound loss in 2008, received a 1.6 million-pound bonus in 2007. The U.K. owns stakes in RBS and Lloyds Banking Group Plc, which acquired HBOS.

February’s draft FSA rules had 10 so-called evidential provisions forcing banks to demonstrate that they were keeping to the general principle of having compensation policies that were consistent with “effective risk management.”

10 to Eight

Today’s code has eight provisions, diluting three that covered how bonuses should be structured. Banks and trade groups complained about the provisions, the FSA said.

Mandatory provisions on deferring two-thirds of bonuses and tying incentives to the performance of an overall group rather than just a trader’s team are now simply recommended practices. While banks have room to offer guaranteed bonuses, or not to defer rewards, they must explain decisions to the FSA, said Nicholas Stretch, an employment lawyer at London-based CMS Cameron McKenna.

‘Less Aggressive’

“The FSA has left it broadly up to the banks,” he said. “It’s less aggressive and they must have decided that a prescription on the detail of remuneration isn’t something they could do.”

An industry group said the FSA decision will improve their ability to attract employees and maintain competitiveness in the global marketplace.

“They’ve definitely gone in the right direction in linking pay structure and risk together,” said Angela Knight, the CEO of the British Bankers’ Association.

If banks don’t comply with the principles they will be considered to have risky pay structures and forced to hold more capital.

“Banks’ remuneration policies should be consistent with, and promote, effective risk management,” FSA CEO Hector Sants said in a statement. “Whilst there is general international agreement on the need for supervisory action on remuneration policies and practices, we will be the first major financial regulator to take this step.”

‘Risk Profile’

The FSA said the guidance should apply to senior executives and traders that have a “material impact on the firm’s risk profile.”

Banks told the regulator that February’s draft rules “were too prescriptive and too inclined to a ‘one size fits all’ approach,” the FSA said. Banks argued that if the rules were implemented in the U.K. alone “they would have adverse implications for the U.K. as a financial center.”

“The FSA has stuck to its principle of linking remuneration to risk, while making the code less prescriptive and narrowing the scope of the organizations covered,” said Peter Montagnon, director of investor affairs at the Association of British Insurers.

Sants called on regulators in other countries to implement similar measures in an editorial in the Financial Times today. The European Union is expected to publish its rules by the end of 2010.

‘Short-Term’ Culture

“The short-term bonus culture in the global banking industry must end,” Treasury Minister Paul Myners said today. “The government is pursuing all options to ensure banks can no longer get away with the risky pay and bonus policies that contributed to the financial crisis.”

Global lawmakers pledged at the Group of 20 Nations’ summit in April to crack down on excessive bonuses to help stem the worst financial crisis since the Great Depression. They said bonuses encouraged traders to take too much risk and banks couldn’t get the money back if traders’ strategies backfired.

“The key issue is now what happens next in the other European countries and G20 partners,” the BBA’s Knight said.

Kenneth Feinberg, the Obama administration’s “special master” on executive pay, is scheduled to receive compensation proposals by tomorrow from Citigroup Inc., American International Group Inc., Chrysler LLC, Chrysler Financial Corp., Bank of America Corp., GMAC LLC and General Motors. The companies must tell him how they plan to pay the 25 top-earning employees.

U.K. banks have until October to show the FSA how they are going to comply with the rules, which come into effect in January.

Barclays Plc said today that it was currently reviewing its remuneration policy in line with the FSA code. Barclays President Robert Diamond said earlier this month that it had paid multiyear bonuses to a “handful” of recruits, the Financial Times reported.

To contact the reporters on this story: Caroline Binham in London at cbinham@bloomberg.net

Last Updated: August 12, 2009 11:48 EDT