Hedge fund ban plan compounds draft EU law splits

LONDON, March 26 (Reuters) - Hedge funds and managers based outside the European Union should be banned from soliciting EU investors unless they meet the bloc's strict new supervisory standards, a senior lawmaker said on Friday.

The draft EU law to regulate alternative fund managers has already been delayed by the bloc's member states this month after Britain rejected proposed curbs on "third country" funds.

The European Parliament has joint say with EU states on the draft but the issue of such external funds has now emerged as a major stumbling block for the assembly as well.

Jean-Paul Gauzes, a French centre-right lawmaker responsible for the draft in parliament, wants to ban third country funds and managers whose home rules are deemed by the EU not to be of an equivalent standard to the bloc's new rules.

"There is no common position in the European Parliament on this issue yet," Gauzes told a briefing by EU lawmakers in London where most of the EU's hedge fund industry is based.

The rules must not create a sieve so that funds with weaker standards can sneak in, Gauzes added.

Britain's EU lawmakers oppose a ban and want member states to be allowed to continue authorising non-EU hedge funds and managers on their territory. They fear the bar set for "equivalence" of standards will be set so high that no funds from outside the EU will qualify.

"We are pretty much in deadlock," said British Conservative centre right lawmaker, Syed Kamall.

"You can't go for an equivalence regime that says you can take our law or else... otherwise it all ends in tears," added Sharon Bowles, a British Liberal who chairs parliament's economic affairs committee.

Stalemate among EU states and now in parliament as well has left the industry worried.

"It's a bit of a mess," said Andrew Baker, chief executive of hedge fund lobby AIMA, after the briefing.

International standards were preferable because otherwise approving EU measures that impinge on third countries could have the reverse effect, British Socialist lawmaker Peter Skinner said.

The United States is also adopting new rules for hedge funds but in line with pledges agreed by the G20 group of leading countries last year whereas the EU measure goes much further.

One leading U.S. senator called this week for counter measures if there are no changes to the EU measure, raising the prospect of a trade spat.

Bowles said the G20 group of leading countries were trying to coordinate financial regulation and the draft "does not send out a very good message."

If Britain was outvoted on the measure it would break an EU taboo of respecting critical national interests, thereby opening the floodgates to other contentious issues, she said.

Gauzes hoped for a final deal with EU states in July to avoid adding years to the approval process.

"My aim is not to destroy the City of London," Gauzes said.

(Reporting by Huw Jones, editing by Patrick Graham)