Labour will use the Queen’s Speech to try to demonstrate that the banks have been tamed with a plan to outlaw the most controversial bonuses.

The Queen’s Speech and this week’s Financial Services Bill will give the Financial Services Authority (FSA) the power to void any contracts that it believes promote inappropriate risk taking. But the legislation will not apply to bonuses for this year, which are expected to increase 50 per cent to £6 billion. Despite the financial downturn, many of the surviving banks have enjoyed a profitable year.

The possibility of huge payouts has also caused controversy because the Government has supported several financial institutions with billions of pounds. Banks will calculate bonuses at the end of this year and pay them to employees between January and March. But the details are already being decided and the timing of the results could embarrass Labour, which will want to show that it have forced the banks to abandon their excesses of past years.

The incoming legislation will not detail the exact types of bonus that will be outlawed, but one of the main aims is to cut out guaranteed bonuses over several years. So-called multi-year guarantees have been reduced to appease the public, but banks such as Barclays have admitted that a few key employees still have these deals.

Lord Myners, the City Minister, said: “If these contracts are written they will be voided under law.” He also said that the measures will become law before the election. They will not apply to existing contracts, because of fears over legality, but to new agreements entered into from next spring. Foreign companies operating in London, such as Goldman Sachs, the US investment bank, will also be subject to the legislation.

Politicians want the FSA to be strict in enforcing the measures, but bankers believe privately that they will be able to avoid them.

Nick Anstee, the new Lord Mayor of London, will say in his inaugural speech this evening that bonuses “were not the root cause of the issue”. He will also call for a “trust between the people and financiers” to be re-established.

David Berman, a partner at the City law firm Macfarlanes, said that the Government’s initiative raised many questions. “Are banks going to have to get bonuses pre-blessed by the regulator before they announce them? What criteria with the FSA use in determining whether a bonus is permissible?” Mr Berman said.

The Queen’s Speech will also ask banks to develop “living wills” containing key financial information that can be used by regulators to wind them down in an orderly way if they face financial difficulties. The Government has also considered forcing a split between retail banks and “casino” investment banks, but has rejected the idea because modern finance is so interconnected.

Another flashpoint will be Sir David Walker’s final report on November 26 on how to improve the way that the banks are run. He is expected to suggest that the most highly paid employees be revealed in bands.

The Treasury could go farther and insist that the banks name these individuals. Senior figures within the institutions that are affected do not believe that the Treasury will take this radical approach.

The Government will stop short of capping the pay of bankers, although it has said that it wants shareholders to take tighter control. Lord Myners said that if this did not happen, “we may have to revisit it”.

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