* FSA chief backs higher taxes to rein in financial sector
* UK Treasury says taxation is a matter for government
* Regulator also under fire for comments on London status
* City of London says no change of "Tobin" tax succeeding
(Adds more reaction, background)
By Kate Kelland and Huw Jones
LONDON, Aug 27 (Reuters) - The UK Treasury and industry groups on Thursday poured cold water on support from the country's top market regulator for a global tax to curb excessive bank bonuses.
Financial Services Authority Chairman, Adair Turner, sparked industry ire after saying a "Tobin" style tax may be needed.
"If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit," Turner told Prospect magazine.
Getting global agreement for such taxes "will be very difficult", Turner said, and angered some in the industry by saying he did not see promoting London as a global financial centre as "a major aim".
Politicians are struggling to deal with mass unemployment and accuse the financial sector of failing to heed lessons from the credit crunch and returning to "business as usual".
French President Nicolas Sarkozy wants the G20 meeting of top industrial and emerging market countries next month to back a global tax and cap on bank bonuses. German Chancellor, Angela Merkel, also wants a crackdown on excessive pay in the sector.
But a UK Treasury spokesman said on Thursday taxation was "a matter for the Chancellor (finance minister)". The FSA said it had no comment.
G20 finance ministers meet on Sept 4-5 and bank bonuses will be on the agenda as they prepare the ground for a summit of the group's leaders in the U.S. city of Pittsburgh on Sept. 24-25.
The FSA has been criticised for failing to address problems that led to the near collapse of the financial system last October. If faces abolition with its powers handed to the Bank of England if the Conservative Party, which is leading in the polls, wins the next election due by June 2010.
Turner told Prospect that "higher capital requirements against trading activities" would be "our most powerful tool to eliminate excessive activity and profits."
"And if increased capital requirements are insufficient I am happy to consider taxes on financial transactions -- Tobin taxes," he added, referring to U.S. economist James Tobin, who suggested a tax on foreign exchange transactions in the 1970s but made little headway.
LONDON'S ROLE
Turner said promoting London as a financial centre was not the FSA's main motivation. "It's clear to me that the FSA has to be very, very wary of seeing the competitiveness of London as a major aim and that's not a popular thing to say," he said.
Under UK law, the FSA must "have regard" to maintaining Britain's competitive position in the financial services and the industry warned the watchdog is ignored this at its peril.
"Other centres would dearly love to have business from London," Stuart Fraser, head of policy at the City of London financial district, told Reuters.
"If we want to shoot ourselves in the foot, they would be delighted to take the business," Fraser said.
Failing to uphold Britain's international competitiveness would be "dereliction of duty" and there was "very little chance" of a Tobin tax succeeding, Fraser said.
Turner's comments marked a big shift in policy and may not be compatible with the UK law, said Oliver Lodge, a regulation consultant and former FSA official.
"To my mind they need to demonstrate they are considering international competitiveness issues around any question they are looking at, for example the remuneration code they recently published," Lodge said.
David Clark, chairman of the Wholesale Markets Brokers' Association, said he was disappointed with Turner's comments as a "Tobin tax" would be inefficient and hinder markets.
"The implementation of a Tobin tax is difficult if not impossible to achieve globally and not doing it globally would be out of the question as it would lead to huge regulatory arbitrage," Clark said.
The head of Britain's banking trade body, Angela Knight, criticised Turner's comments, saying if Britain acted unilaterally it would see the sector shift elsewhere.
"If we say we do not want to have an international competitive industry here (in the UK) then we will do to financial services what we have done to manufacturing and engineering in the past, and that is have it as a minor industry and lose out to others," Knight told the BBC. (Reporting by Kate Kelland; Editing by Andy Bruce)