The European parliament has opened a new front in its battle against bonuses in the financial sector. Having capped the ratio of variable to fixed pay for bankers, it now wants to extend this clampdown to fund managers. It may only be time before the net is widened to hedge funds and other financial institutions.

Fund managers have often been criticised for charging high and murky fees. The incentive structure in their pay deals can be geared towards short-termism. But the maximum 1:1 cap that MEPs want to enforce is not the answer. It will simply lead the industry to circumvent the rules by offering higher fixed salaries, as is already happening with banks. Bonuses are a good way to link pay to performance in highly cyclical industries: lawmakers should ensure that they are awarded on the basis of transparent principles, rather than limiting their size.

It is also questionable whether MEPs have the right to regulate pay across the financial sector. They argue that applying the rules designed for bankers to fund managers creates a level playing field in the industry. Yet, banks are different. Voters have an interest in ensuring they are properly run, since governments are often on the hook when things go wrong. But the same argument about public good does not apply to most fund managers or hedge funds. Regulating their pay is over-reach.