The Financial Services Authority has warned banks they face heavy financial penalties if they agree to pay their executives a guaranteed bonus for more than a year, newspaper reports said on Tuesday. The financial services watchdog has written to 40 chief executives in the banking and finance industry warning that long-term guarantees to lure star traders could put them in breach of its new code, the Financial Times said.

The new code on remuneration was prompted by the multi-billion pound taxpayer bailout of banks late last year in the wake of the world financial crisis.Bonuses have been heavily criticised amid revelations some bankers and traders were rewarded for taking financial risks to make profits that quickly turned to heavy losses. The worst international financial crisis for decades has since dragged most major economies into a deep recession. Sir David Walker, charged by Prime Minister Gordon Brown with tackling corporate governance in the financial sector, said in a damning report last week that boardrooms needed to stop excessive risk-taking which sparked the crisis.

In the letter, FSA chief executive Hector Sants demands that firms send their remuneration policies to the regulator by the end of October so that their compliance with the code can be scrutinised, the Guardian said. "In particular, I would draw your attention to the fact that guaranteed bonuses which run for a period of more than one year may be inconsistent with effective risk management," the letter said. The code is expected to be endorsed by the FSA's board soon and come into effect in January next year, the paper added.