Bankers should "do the right thing" in salaries and service to clients and not be driven purely by the size of their pay packets, top UK regulator Hector Sants said on Tuesday in his last speech before standing down.
Britain's top banks such as Barclays, Lloyds and Royal Bank of Scotland have already been warned by investors to rein in excessive pay at a time of shrinking rewards for shareholders.
Sants, chief executive of the Financial Services Authority (FSA), said it was not up to regulators to determine pay but there should be an expectation that bankers were driven in part by the "desire to do the right thing".
"Should all of our conduct and behaviour be driven by pure financial incentives?" Sants told an audience invited to hear his final speech at the helm of the UK watchdog which will be scrapped next year.
"It should not solely be about how much we earn but also about how much we care for the markets' users and their well-being," Sants said, alluding to a string of mis-selling scandals that have hit Britain over the past two decades.
Sants looked tanned and relaxed ahead of stepping down in June after five years at the helm of the FSA, during the worst financial crisis in living memory when Britain had to rescue several banks.
The FSA will be scrapped next year and Sants was due to become Deputy Governor of the Bank of England, heading a new supervisor for banks and insurers, but the former banker decided it was time to call it a day.
He said steps taken by global regulators to beef up bank capital and liquidity levels will help make the system safer, but the boards of banks must also step up to the plate too.
The FSA ditched its "light touch" regulatory approach from 2007 as the credit crunch began unfolding and the tougher, more intrusive approach was "having an impact".
He repeated his most memorable pronouncement that firms should "still be afraid" of the FSA, prompting some lawyers to say supervision should be based on dialogue not fear.
In the past two years the watchdog has scrutinised 653 applications for key positions at financial firms, with 48 withdrawn, and of those 39 followed FSA concerns.
Sants sought to correct what he said were "misperceptions" about this tougher approach, aimed at correcting pre-crisis boardroom faults of poor knowledge about finance and too little backbone to challenge domineering chief executives.
"With regard to technical skills, let me be clear, the FSA is assessing whether the board collectively understands and can address the breadth of the business," Sants said.
"We do not expect all non-executive directors to be technical experts in financial services and we certainly do not expect every member of the board to have the same degree of technical knowledge."
He dismissed criticisms that appointing top staff had become an overly lengthy process.
"It is still a view held by some, unfortunately, that they are 'entitled' to a position regardless of their skills and experience," he said.
Sants was at the helm of the FSA when the government had to rescue Royal Bank of Scotland and two lessons stood out on the corporate governance side, he said.
There should be a presumption that if someone was on the board of a bank that fails then they should not be allowed to carry out the same role in future.
It was also vital that penalties were raised and that the FSA cannot be influenced by commercial criteria when making its judgements, he said. "Commercial success should not place an individual above the law." (Editing by David Holmes)