(Updates with comments from RBS CEO Hester starting in eighth paragraph.)

Feb. 8 (Bloomberg) -- Chancellor of the Exchequer George Osborne warned against allowing an “anti-business culture” to take hold in Britain after lawmakers sparred over an opposition Labour Party motion calling for all banks to curtail bonuses.

“A strong, free market economy must be built on rewards for success,” Osborne told business leaders in London yesterday. “There are those who are trying to create an anti- business culture in Britain -- and we have to stop them. At stake are not pay packages for a few but jobs and prosperity for the many.”

As banks enter their bonus season, they’ve been on the receiving end of an unprecedented public backlash that led Royal Bank of Scotland Group Plc Chief Executive Officer Stephen Hester to waive his bonus, prompting concern among some executives that Britain risks damaging its business-friendly reputation. Yesterday’s motion in Parliament was defeated by 295 votes to 244.

Hester’s Jan. 29 announcement that he’d give up his 963,000-pound ($1.5 million) bonus followed mounting public and political pressure over high pay for executives at a time of austerity in the country as whole. Two days later, his predecessor, Fred Goodwin, was stripped of the knighthood he’d been awarded in 2004 for “services to banking” because of his role in leading RBS into the world’s biggest bailout.

Reform Needed

“The future of the banking sector is bigger than the individuals who have featured in the headlines of late,” Labour’s business spokesman, Chuka Umunna, said as he opened the debate in the House of Commons in London. “We have to reform the way the system works.” He said that “bonuses have continued to be paid out as a matter of course” even though “banks have made thousands redundant.”

RBS was bailed out by the government in 2008 and Labour says that even banks that weren’t should show restraint because they benefit from an implicit state guarantee. Labour is calling for the reinstatement of a bank-bonus tax. Umunna’s motion pointed to a fall in net lending to business and argued that a culture of excessive bonuses has damaged the U.K. economy.

Hester said yesterday the political and media attention on his bonus was “discomforting to say the least,” according to an e-mail distributed to employees. “There is no doubt our position in the spotlight makes the job harder.”

In an interview with BBC Radio today, Hester said RBS was trying to defuse “the biggest time bomb in history” and that it is essential the bank is able to recruit the best people for the task.

Wealth Creation

While he had “great sympathy and understanding” for people concerned about rewards in the banking industry, “we would make a mistake as a society if we forget how wealth is generated and how successful people are motivated,” he said.

Barclays Plc’s Robert Diamond, Britain’s top-paid bank CEO, is the next executive likely to face scrutiny. Diamond was awarded a 6.5 million-pound bonus for 2010 and a further 2.25 million pounds depending on the lender’s performance.

Unlike RBS and Lloyds, where the U.K. taxpayer is also the biggest shareholder, the government has no stakes in Barclays, HSBC Holdings Plc or Standard Chartered Plc, making it difficult for the state to exert bonus restrictions.

Miliband argued in a speech last week that even though Barclays and HSBC weren’t bailed out, they’re still benefiting from unspoken government backing and should behave accordingly. He said voters expect them to exhibit restraint in difficult economic times.

The furore over top pay also led Network Rail CEO David Higgins and his fellow directors to waive their bonuses this week. The company runs the U.K.’s railway lines.

--Editors: Eddie Buckle, Andrew Atkinson

To contact the reporters on this story: Robert Hutton in London at rhutton1@bloomberg.net; Gonzalo Vina in London at gvina@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net