British Bankers' Association Slams FTT
13 May 2013
Posted by: Author: Amanda Banks
Source: Amanda Banks (Tax-News.com, London)
The chairman of the British Bankers' Association, Sir Nigel Wicks, has written to the Governor of the Bank of England warning that the European Commission has "seriously underestimated the cascading effect" of a planned Financial Transaction Tax in part of the European Union, and urging the Bank "to consider whether there may be broader threats to monetary policy, financial stability and the wider economic interests of the EU arising from the introduction of this tax as currently devised."
Currently, eleven EU countries have agreed to introduce a Financial Transaction Tax (FTT), under provisions for "enhanced cooperation" within the EU. However, although the UK has firmly ruled out any possibility of participating, concerns have been raised that the tax will have detrimental effects on British business. Wicks' letter comes in the wake of a recent challenge to the tax lodged by HM Treasury at the European Court of Justice, which in turn followed a letter to Chancellor George Osborne from the House of Lords European Union Committee asking the UK Government to seek "urgent legal advice."
In his letter to Sir Mervyn King, Wicks argues that claims that the tax will be low are misleading: although there is a harmonized minimum of 0.01 percent for notional interest on derivatives and of 0.1 percent for other finance instruments, the tax will apply at each leg of any transaction, which may include broker dealers and clearing houses. Further, financial instruments liable to UK Stamp Duty would incur double taxation.
Wicks also draws attention to an analysis shared by the Czech Government on how the tax will affect repurchase agreements (also known as "repos") involving government bonds, which concluded that the tax would amount to 25 percent per annum. Citing "analysts," Wicks warns that the EUR1 trillion European overnight repo market may collapse, damaging the liquidity of the financial system and having a disproportionate effect on SMEs.
Other effects predicted by Wicks include: companies simplifying their hedging, which would undermine risk mitigation in the financial system; increased costs for consumers; and conflict with European initiatives such as the European Market Infrastructure Regulation and the Liquidity Coverage Ratio, which could disincentivize secured lending and central clearing.
Wicks suggests that the use of regulations would be a better means to discourage speculative transactions without economic purpose.