Harriet Harman triggered renewed tensions with Downing Street yesterday after vowing that the Government would not allow Sir Fred Goodwin to keep his £693,000-a-year pension.

Describing the payment as “money for nothing”, the Labour deputy leader said that Sir Fred should not count on retaining the entire pension pot — worth at least £16 million — even though it was approved by the Government last autumn.

Lord Myners, the City Minister criticised for signing off the deal, will face questions from the Treasury Select Committee about why he approved it.

The Treasury is struggling to find a way to claw back some of the money after employment lawyers said that attempts to take it through the courts would be unlikely to succeed.

George Osborne suggested that Ms Harman’s words were meaningless, adding that the Government had an opportunity to stop the payments in October. The Shadow Chancellor said that Britain should follow the example of the United States and pursue allegations of criminal conduct in the City more vigorously. He is examining proposals for the creation of a body, linked to the Serious Fraud Office, to look at fraud and other crimes in the financial sector.

Ms Harman told the BBC that if Sir Fred, the former chief executive of RBS, did not give up the money voluntarily, “it will not be accepted and the Government will take action”.

The basis of the agreement to give Sir Fred his full entitlement is being examined by lawyers at Slaughter and May at the request of the Treasury.

Asked if this would mean passing legislation, Ms Harman said that she did not want to reveal possible methods but emphasised that he was not morally entitled to keep the payments. “To get a severance payment when you’ve led a bank to the brink of collapse with record losses and thousands of people fearing for their jobs and requiring the public to step in with loans to back up the bank, that is a matter of public interest now and the Prime Minister has said that that is unacceptable,” she said on The Andrew Marr Show.

“The Prime Minister has said it is not acceptable and therefore it will not be accepted. It might be enforceable in a court of law, this contract, but it’s not enforceable in the court of public opinion and that’s where the Government steps in.”

Margaret Beckett, the Housing Minister, later played down suggestions that the Government planned a change in the law. She refused to be drawn on what action would be taken. Downing Street sources also distanced themselves from the idea.

Vince Cable, the Liberal Democrat Treasury spokesman, said that the Government should present Sir Fred with an ultimatum: accept £27,000 a year or sue for the rest.

The furore erupted after RBS, in which the taxpayer now has a stake of 70 per cent, posted annual losses of £24.1 billion, a British corporate record. Experts have said that the total value of Sir Fred’s pension pot is likely to be closer to £30 million, because the £16 million figure suggested last week was based on over-optimistic assumptions about his longevity and returns from the stock market.

The Tories said that the British authorities had been too lax in investigating and prosecuting financial crime. Mr Osborne said: “Financial crime cannot be allowed to go unpunished. We have to understand that sometimes what’s needed is not a slap on the wrist but a pair of handcuffs. We need a strong, independent regulator committed to prosecuting those who commit crimes in the City.”

A review of City regulation by Sir James Sassoon, for the Conservatives, is examining whether prosecution powers should be removed from the Financial Services Authority, which only pursued three cases last year, and handed to a new body.

Sir Ken McDonald, QC, the former Director of Public Prosecutions, wrote in The Times last week that the country needed a regulator and law enforcement authority that inspired respect and fear. “In Britain, no one has any confidence that fraud in the banks will be prosecuted as a crime. But it is absolutely critical to public confidence that it should be,” he suggested.

The renewed focus on Sir Fred’s pension came as the Treasury faced demands to release a government dossier prepared before the Lloyds takeover of HBOS. Details of Lloyds’ participation in the asset recovery scheme are expected this week. Negotiations were put on hold over the weekend.

It seemed like a good idea . . .
Harriet Harman’s recent interventions

The idea Equality requirements for private companies bidding for public contracts
The reality Almost certain to be dropped by Lord Mandelson

The idea Claw back bonuses from bankers
The reality Initially scoffed at by more Blairite Cabinet members, the idea has quickly gained favour

The idea A review of proposals for a legal duty for public bodies to promote equality
The reality Review watered down at the last minute. Whitehall sources say that it will never happen

The idea Delay Post Office legislation going through the Commons because of unhappiness in the Labour Party
The reality Jury still out. Legislation still likely to come before the summer but timetable not finally decided

The idea A series of meetings with businesswomen in the run-up to G20
The reality Harmless idea magnified by opponents of Ms Harman as a way of attacking her

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