The City watchdog was yesterday accused of giving banks the go-ahead to continue paying multi-million pound bonuses when it failed to introduce tough regulations.
The Financial Services Authority (FSA) released new proposals on City pay, which backed away from sweeping aside the financial sector's bonus culture. The Treasury indicated that they did not go far enough.
Under the new guidelines, banks must consider the link between risk and reward. However, they will be left with more freedom to structure bonus packages than was expected, and many bank executives and smaller City firms will be excluded.
This represents a softening of some of the tougher guidelines in the original FSA proposals in March.
Lord Myners, the Financial Secretary, said: "The short-term bonus culture in the global banking industry must end. 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 crisis."
This coincides with the news that unemployment is at a 14 year high, and the Bank of England has admitted that the recession was deeper than previously thought and that recovery would be slow.
Royal Bank of Scotland, which is 70 per cent taxpayer owned, has hired two bankers on huge bonus packages. Antonio Polverino, headhunted from Merrill Lynch, will earn £7 million in his first year.
Vince Cable, the Liberal Democrat Treasury spokesman, said that the FSA has "capitulated at the first sign of dissent".
George Osborne, shadow chancellor, added: "The FSA has pulled its punches, leaving the promises of the Prime Minister and others to curb excessive bonuses absolutely worthless."
The FSA insisted that the guidelines would still force banks to be more careful when considering their bonus policy.