BANKERS’ contracts could be ripped up by City regulators and their banks fined under tough new powers designed to prevent another collapse of the financial system.

Alistair Darling, the chancellor, will publish legislation this week that includes curbs to prevent the “casino” activities of the banks.

The financial services bill, to be introduced in the Queen’s speech on Wednesday, will hand fresh responsibility to the Financial Services Authority (FSA) to clamp down on bankers pocketing excessive bonuses or even to cancel pay packages that encourage too much risk-taking.

Darling said last night that his bill would give the FSA “powers, if necessary, to tear up contracts that would result in payments being made that would cause instability”.

From next year, the chancellor will impose “living wills” on banks to ensure they can be wound down without disrupting the entire financial system and forcing taxpayers to step in. These, together with action to boost capital requirements and end risky remuneration practices, are intended to prevent a repeat of the crisis of last autumn when Royal Bank of Scotland and HBOS came within hours of collapse.

Darling remains angry with the banks for their failure to change their attitudes and behaviour. “They just don’t get it,” he said last week.

This week’s bill is also intended to address public outrage over bonuses. “We will ensure that the banking crisis we have experienced over the past two years should never again come at a cost to the taxpayer,” Gordon Brown said last night.

“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.”

The bill will grant new powers to consumers to take American-style class action suits against firms that mis-sell pensions, mortgages or other products. Currently there is no legal right for groups of individuals to mount joint legal actions.

The FSA will be given powers to bring banks and other institutions to account if it receives a group of similar complaints about alleged sharp practice. Ministers hope that in the future fewer consumers will need to resort to legal action.

The bill will contain a provision outlawing the use of credit card cheques. The FSA will also be required under law to establish a separate consumer education agency, following claims that the regulator had been failing to inform people of the potential pitfalls of different financial products.

This will lead to the establishment next year of a free nationwide financial advice service funded by the banks. Ministers hope it will mean investors and borrowers will no longer have to rely purely on the biased advice of banks and financial advisers who are trying to sell particular products.

The financial services bill will beef up the existing tripartite system of City regulation — the Treasury, Bank of England and the FSA — with a new Council of Financial Stability. But Darling sought to dismiss the fear that new rules would drive financial services firms out of the country.

“We want London to remain the world’s foremost financial centre,” he said, “but part of that is to make sure there is a tough regulatory regime.”

The Queen’s speech will also include another Treasury-sponsored bill, the fiscal responsibility bill, which will enshrine in law a commitment to halve the budget deficit over four years.

n The FSA is close to announcing a string of grandees who will join the watchdog’s crusade to police senior City appointments. Sir Dominic Cadbury and Sir Brian Pitman are two of the recruits joining the panel designed to vet senior banking appointments.

The approvals system for senior directors, including chief executives and chairmen, who hold a “significant influence function” has been tightened up by Hector Sants, the FSA’s chief executive, in the wake of the banking collapse.

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