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Financial Transaction Tax Attracts More Criticism

Eleven financial industry associations in Europe joined forces at the end of October to urge UK chancellor George Osborne to reject any attempt to impose a European Union financial transaction tax.

Signatories to a letter sent to the chancellor include the British Bankers’ Association, the Association for Financial Markets in Europe, the International Swaps and Derivatives Association, the Alternative Investment Management Association, the Association of British Insurers, the London Energy Brokers’ Association and the Wholesale Market Brokers’ Association.

The groups want the chancellor to resist pressure from France and Germany and take a “strong stance” against the FTT. He was urged to work closely with other countries that oppose it. The letter comes ahead of the sixth G20 summit in Cannes, France on November 3-4, where leaders from the world’s largest economies will meet to discuss the tax and other topics.

“It is the strong belief of the associations that the proposed FTT will increase various costs within the financial system and impede the efficient operation of markets which are crucial not only for direct market participants, but for the vast array of end users who benefit from an efficient financial system,” the letter reads.

“A FTT would result, for example, in increased mortgage costs and reduced pensions for the public as the cost of managing risk and investing increases for the financial sector. It would impact ordinary savings and pensions more generally through the direct tax both on the funds themselves and on the sale and purchase of units/shares in investment funds – and private investors will for the first time have to pay tax when they sell securities, not only when they buy them.

“These costs have been underestimated or ignored by supporters of a FTT who feel that it is possible to limit the impact of any tax without understanding the complex interactions between financial markets and the wider economy.”

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The European Commission proposed an EU-wide financial transaction tax to start in January 2014. The EC says it would raise approximately 57 billion euros per year to aid national and regional budgets by levying 0.1% on stocks and bonds and 0.01% on derivatives trades between financial institutions when at least one party is located in the EU.

Making the industry pay certainly has popular appeal and the tax is backed by France and Germany, two of the EU’s most powerful members. German Chancellor Angela Merkel has criticised governments, including the US administration, for refusing to make the financial sector pay for the global financial crisis.

But the proposal has prompted opposition from countries including Sweden, the Netherlands and the UK. Financial industry groups say the potential economic impact that the proposal brings has been underestimated, and that even a small negative effect on GDP in the current climate could significantly affect many people outside the financial sector.

In a statement, the Futures and Options Association said that a comprehensive analysis should be conducted of the potential economic and market consequences which could become a by-product of the proposal’s introduction.

Anthony Belchambers, chief executive officer of the FOA, said, “This may be a politically populist initiative, but the Swedish experience in introducing a financial transaction tax in 1984 saw an 85% fall in bond-market volumes in its first week and a subsequent 98% fall in futures volumes with the result that the tax was abolished by the Swedish government in 1991 – after which volumes gradually returned to the Swedish marketplace.

“The imposition of such a tax in the EU will be yet another cost that will be borne indirectly by market users and will further incentivise the migration of trade flows to untaxed jurisdictions and financial markets.”

Industry group, the International Swaps and Derivatives Association has warned that the tax would be harmful to both the financial sector and to corporations that rely on derivatives to hedge their risks.

“The derivatives industry provides important risk management tools helping to achieve growth in the economy. It serves a variety of large, medium and small corporations and entities, which use derivatives products to manage interest rate, currency, credit and counterparty risks. ISDA is concerned that the tax will ultimately increase the costs of hedging those risks. We believe that managing such risks is essential for the long-term economic growth and recovery of European economies.”

ISDA believes also that the tax risks reducing the capital base of financial institutions at a time when regulators are demanding higher capital buffers. If the additional cost is simply passed on to customers, this would act as a barrier to them accessing the financial markets, as well as restricting liquidity (and therefore increasing volatility) in those markets, ISDA warned.

British lobbying organisation, the Confederation of British Industry, also weighed in on the debate. Dr Neil Bentley, deputy director-general at the CBI, said, “The European Commission’s decision to press ahead with a Financial Transactions Tax is completely misguided at a time when it’s clear that Europe needs a relentless focus on growth.

“The Commission’s own official impact analysis shows that the proposed tax could dent long-run EU gross domestic product by more than €100 billion. The financial transaction tax is a crude instrument that would increase the cost of capital for business, hold back their growth potential and raise minimal revenue in return. It would be particularly damaging for the UK, as Europe’s leading financial centre, as it would divert activity to other financial hubs like New York or Hong Kong.”

At a recent ACI UK event, Angela Knight, chief executive of the British Bankers’ Association, discussed the impact of the tax on London as a financial centre.

“It’s not easy for a bank to redomicile,” Knight said. “The question will be out of which jurisdiction they choose to do which part of their business? We risk creating a toxic environment for banking and this does not help economic recovery here or elsewhere.

“The industry needs to speak with a single voice on this topic. It’s up to each bank, each trade association and the government to make the case that transaction taxes do not solve problems – they create a different one.”

Morgan McDonnell, ACI UK president and global head of foreign exchange at RBC Dexia, said: “Banks from all over Europe base their trading operations in London. While there is a question mark over how much money this transaction tax will raise, there is no doubting the impact it will have on London as a place to do business and the effect on economic growth. We have to defend the importance of trading activities to London as the home of the EU’s biggest financial services industry.”

While debate over the tax rages on, many observers say simply that reaching an agreement among the 27 EU member states, or even the 17 nations of the euro area, is likely to be impossible. To have any chance of being passed, tax proposals need to be targeted at only those countries interested in such an effort.

Speaking to Bloomberg, Sony Kapoor, managing director of policy group Re-Define Europe, said, “Having a design that deliberately is set up to be possible at a national level is the only sensible thing to do, if indeed you are serious about such a proposal, as at least the president of the European Commission seems to be.”

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