ICAP, an interdealer broker and provider of post trade risk and information services, has released its analysis of the potential impact of implementing a financial transactions tax (FTT).
Eleven countries have provisionally agreed to introduce a tax on financial transactions with the stated objective of raising public finances and reducing risk taking. ICAP believes the FTT would:
- Have a negative effect on the real economies of the FTT zone
- Significantly increase funding costs for government and corporates, in particular those in the FTT zone
- Run counter to EU Treaty freedoms
- Increase systemic risk
- Not benefit the UK Government financially despite the UK being one of the largest generators of FTT revenue
- Lead to the migration of markets rather than a net global reduction.
While the proposal includes an exemption for Debt Management Offices (i.e. the issuers of public debt) it does not seek to safeguard secondary market trading in public debt which would result in an increased cost of funding and capital burden for governments. Bank of America Merrill Lynch has estimated the FTT will result in an increased annual interest cost of EUR6.5bn to EUR8.5bn for Germany, Italy and France in the first year.
While the UK is not one of the countries seeking to adopt the FTT, economic activity located in the UK is likely to be among the largest generators of FTT revenue; however, any revenue generated would be paid to tax authorities in the FTT zone and not to the UK Government.
The FTT would significantly raise costs for corporates based in the FTT-zone, which will find it more expensive to issue debt and equity. It will also be more expensive for them to modify their risk exposure.
Repo is within the scope of the FTT and this would significantly increase banks’ short-term funding costs. This would almost certainly be largely transmitted to the private sector, resulting in negative effects on investment, employment and output.
In addition to this, firms around the world will need to undertake major systems change in order to be able to collect the tax as there is currently no collection mechanism in place.
While the stated aim of the FTT is to reduce risk taking, systemic risk could in fact increase. The FTT runs counter to G20 objectives and obligations under the European Market Infrastructure Regulation by disincentivising central clearing.
The proposed FTT appears to run counter to established EU Treaty freedoms. Specifically, the measure runs counter to the freedom of movement of capital, and, treating overseas branches of FTT-zone firms less favourably than those operating through subsidiaries is not compatible with the freedom of establishment required under the EU Treaty.
Michael Spencer (pictured), group chief executive officer of ICAP, says: “The proposed FTT is a misguided policy which would be severely detrimental to both EU economies and businesses. According to our research, if implemented, it would severely damage the functioning of debt markets which are essential for governments and companies to raise finance. It would increase both their borrowing and operational costs and lead to a flood of financial activity being moved outside the FTT zone. It is particularly ironic that London, as one of world’s leading financial centres, will generate the lion’s share of this revenue and act as collection agent despite the UK being outside the FTT zone and our government being vehemently opposed to the introduction of this tax. The impact on the City if the FTT is adopted in anything like the manner advocated would be devastating.”