Guy Hands, the boss of private equity firm Terra Firma, is returning to outside investors the greatest part of his and his senior management's bonuses earned over the past four years - worth some £70 million.

Hands, who oversaw the £3.2 billion takeover of music giant EMI just two years ago, launched an astonishing attack on investment banks and their bonus culture. Until he set up Terra Firma in 1994, Hands was one of the country's best rewarded investment bankers when he worked for the London arm of Japanese bank Nomura.

Today he urged the separation of commercial and investment banking.

"We have to return to a banking system where there is a division between commercial lending banks, which take deposits and are effectively back-stopped by Government, and investment banks, which take a variety of significant risks in pursuit of fees and quick gains," he said in his annual review.

"We cannot afford a financial system where heads the investment bankers win and tails everybody loses."

Hands would have collected about £35 million, or half the firm's "carried interest", representing his share of gains made on investments since 2004. Another £35 million would have been split between 70 or so executives.

Largely because of a £1 billion write-down on the value of the EMI investment, Terra Firma will instead hand the gains on other holdings over to external investors next month.

"This is absolutely right," Hands said. "Our investors have suffered and therefore our rewards should suffer at the same time. Such long-term rewards throughout the entire financial system would have led to a very different world to the one we find ourselves in today."

"The short-term bonus culture of most financial groups meant that many senior executives were incentivised to ignore or avoid longer-term risks, whilst enjoying extraordinary short-term gains." Hands urged bonuses and incentives to be based on five to ten-year performance and paid under clearer and simpler structures. The tax regime had also resulted in "non-economic actions and inefficiencies".

Hands warned that private equity faced a tough time and "returns on many of the investments that were made in 2006 and 2007 - the top of the market - will be much lower than the historic norms for private equity".