City regulators are to be given new powers to tear up bankers’ contracts if they include excessive pay and bonus deals which might threaten the stability of the financial system, it was revealed today.

The measures will be included in a Financial Services Bill forming the centrepiece of Wednesday’s Queen’s Speech, which Gordon Brown said would offer a thorough overhaul of controls over the banking industry.

In a podcast on the Downing Street website, Mr Brown said: “We will ensure that the banking crisis we have experienced over the last two years should never again come at a cost to the taxpayer.

“This means a transformation of the way the financial sector is policed, with banks themselves and not the taxpayer made to pay for bank failings.”

Tories dismissed the proposal as “headline-chasing” which would do nothing to prevent a multi-billion round of bonus payments in the City this Christmas.

And the British Bankers’ Association warned that any legislation should not be designed in a way that might drive financial institutions to relocate away from the UK.

But Alistair Darling said that bankers must start seeing themselves as “fellow citizens” and said the public regarded some of the bonuses they had received as “ludicrous”.

The Chancellor told the Sunday Telegraph that his bill would give the Financial Services Authority “powers if necessary to tear up contracts that would result in payments being made that would cause instability”.

The legislation will enable the FSA to require banks to renegotiate remuneration packages which breach its pay code, and fine those which continue to offer unjustifiable sums.

The new rules will come into effect next year if the Bill completes its passage through Parliament before the election - which must be held by June 3 - and will affect all new contracts. They will apply to all UK banks, including RBS, Lloyds, Barclays and HSBC as well as the UK operations of global investment banks like Goldman Sachs.

Other provisions will require banks to hold larger capital reserves and to prepare so-called “living wills” to ensure they can be wound up in the case of failure without putting the entire financial system at risk.

Lord Myners, the City minister, told Sky News’ Sunday Live that the measures would “de-risk” the banking system and suggested that senior banking figures were “very keen” for the Government to exercise control over the bonus culture.

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