MEPs approve tough new curbs on the City's bonus culture

Europe-wide curbs on bankers' pay were approved by the European Parliament yesterday as the City of London prepared a charm offensive in a bid to stave off further regulatory assaults. The new rules, which include capping the cash proportion of any payment at 30 per cent – 20 per cent for bigger payouts – will also apply to the likes of hedge fund managers and staff of other financial companies.

Arlene McCarthy, the MEP responsible for the deal with the European Commission that has seen the rules passed into law, said they would "transform the bonus culture and end incentives for excessive risk-taking".

She rounded on criticism of the rules from hedge funds and the City, saying: "They are designed to align payments with the interests of investors. I would have thought hedge funds would be keen on doing that, rather than finding ways round the rules and complaining."

While the Financial Services Authority's own crackdown on bonuses is arguably even tougher, it applies only to the 27 biggest banks operating in London. The scope of the European rules is much wider.

Ms McCarthy, who is vice president of the economic and monetary affairs committee, added: "Financial experts agree that a high-risk, short-term bonus culture, combined with a lack of capital, were at the heart of the global financial crisis in 2008. Governments and taxpayers bailed out the banks with €3.9 trillion of support. In Britain alone ne, the support was £1.2trn – almost as much as a whole year's GDP. Remuneration policies must first and foremost prioritise the health and stability of a financial institution."

British MEPs criticised the BNP and the UK Independence Party for opposing the rules. A Liberal Democrat MEP, Sharon Bowles, said: "Today we voted to ensure that there will be... a cap on cash bonuses and measures to make sure that top bankers take the hit rather than taxpayers. I'm gobsmacked that UKIP and the BNP don't see fit to support these measures and I wonder what their constituents would have to say on the matter."

The rules do not limit the size of bonuses. But from next January, senior bankers will have to defer at least half their bonus for at least three years. National regulators will be responsible for policing the legislation and have been given some discretion as long as they justify their policies.

There are also options for firms, such as hedge funds, to pay through other instruments if they do not, for example, have shares. Many bankers are being paid in restricted stock in the companies in which they work.

Nick Anstee, the Lord Mayor of London, said the UK and the City needed to build stronger, more pro-active links in the European Union when it comes to the policy-making agenda. He said: "That is why we are travelling to Brussels this week to meet again with [EU Internal Market] Commissioner [Michel] Barnier and ensure the City's voice on important changes to the regulatory landscape and their impact on the UK financial services industry is heard.

"This is particularly pressing given recent developments in the EU relating to remuneration.

Current and future EU proposals such as the new rules on bank bonuses and the AIFM [Alternative Investment Fund Managers] directive could have a significant impact on the UK financial services industry and particularly hedge funds and asset managers, despite their limited role in the global financial crisis."

Mr Anstee said it was "imperative" that European legislators remember the "contribution" made by the City to the continent's economy.