By William James and Matt Scuffham
LONDON (Reuters) - British Prime Minister David Cameron refused on Wednesday to answer a call to cap individual bank bonuses at the largely state-owned Royal Bank of Scotland (RBS.L), but said he would veto any increase in the bank's overall pay pot.
Bankers' pay leapt into British political focus ahead of the annual financial sector bonus season, when the opposition Labour party called on the government to block any attempt by RBS to pay its top staff bonuses worth twice their salary.
The Conservative-led government stopped short of agreeing to that, saying it had yet to receive any proposal from RBS.
But, in an effort to show his government is taking a hard line on excessive pay, Cameron promised that the government would use its veto power as an 81-percent shareholder in RBS to block any rise in the overall pay pot at RBS's investment bank.
"If there are any proposals to increase the overall pay, that is pay and bonus bill at RBS, at the investment bank ... we will veto it," Cameron told parliament.
RBS had been expected to join rivals, such as Barclays (BARC.L) and HSBC (HSBA.L), in seeking shareholder approval to pay bonuses twice the size of salaries. A European Union bonus cap lets banks double bonuses if they win shareholder backing.
Hoping to cash in on Britons' dim view of bankers, Labour argued that the government should not allow the heavily loss-making bank to bypass the EU cap at a time when ordinary families' living standards are being squeezed by stagnant pay.
Labour finance spokesman Chris Leslie called Cameron's veto on total pay "a complete red herring", highlighting that with RBS shedding staff, it provided little restraint.
The furor will hamper efforts by new RBS boss Ross McEwan to steer calmly through the bonus season. McEwan waived his annual bonus following public anger over the pay of his predecessor Stephen Hester.
Britain's finance minister George Osborne and many banks in London oppose the EU curbs, arguing they will force up fixed salaries and could drive important staff to rival institutions.
Bank of England Governor Mark Carney also told Britain's Treasury Select Committee on Wednesday that he agreed that a bonus cap was not the best way to control bankers' pay.
RBS, rescued by a 45 billion pound ($74 billion) government bailout during the 2008 financial crisis, said that no decisions had yet been taken on pay and conversations were continuing with shareholders. The Treasury declined to comment.
LABOUR BANK REFORMS
Ahead of a 2015 election Labour's proposal formed the first part of a renewed push to convince voters the party had learnt the lessons of the financial crisis which occurred during their time in power.
Labour has around a 5 percentage point overall lead over the Conservatives in opinion polls, but the public's view of its economic management skills lags that of Cameron's party.
Labour leader Ed Miliband is expected to unveil proposals to force Britain's biggest banks to sell branches in a keynote speech on Friday, although party sources would not give any further details of his plans.
Speaking to The Times newspaper, RBS chairman Philip Hampton said any forced disposals of branches would be "incredibly expensive", citing the difficulties the bank has experienced selling 315 branches that it was ordered to offload by the European Commission.
"That's already taken us four years and there is still a year or two to go. We've paid a billion quid
RBS has shrunk its investment bank since 2008, meaning it has fewer staff than competitors who could be in line for big bonuses. However, it still paid out more than 600 million pounds in bonuses last year, including payouts of more than a million pounds to 93 employees.
The bank had 368 so-called 'code staff', or those in risk-taking positions, in 2012, earning an average of 700,000 pounds. Their bonus was on average 1.3 times their fixed pay.
RBS made a pretax loss of 634 million pounds in the third quarter of 2013, although that was down from a 1.4 billion loss a year ago.
(Editing by Andrew Osborn and Louise Heavens)