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Robin Hood Tax the Formal Review of the Markets in Financial Instruments Directive Feature and Market Abuse Directive Is Underway

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Robin Hood Tax the Formal Review of the Markets in Financial Instruments Directive Feature and Market Abuse Directive Is Underway Financial Newsletter Amafi INTERNATIONAL AND FRENCH MARKET NEWS LES PROFESSIONNELS DE Association française December 2011 No15 desLA BOURSE marchés & financiers DE LA FINANCE The Not-So-Merry Robin Hood Tax The formal review of the Markets in Financial Instruments Directive Feature and Market Abuse Directive is underway. In mid-October the European Commission published draft legislation – a directive and regulation in both cases – for the European Editorial Council and the Parliament. The proposals are Editorial fundamentally important. Not only do they underpin the framework in which the financial market activities represented by AMAFI are conducted. Also, and perhaps more importantly, they seek to correct certain shortcomings in the financial markets and restore their credibility, which has been seriously undermined both by these shortcomings and also by the crisis. The analytical work and the quest for alternative or complementary solutions undertaken by AMAFI, as reflected in this newsletter, will be taken forward with that fact in mind. Increasing calls for a tax on financial Yet the proposal by the European Commis- This is because markets need the trust transactions, including a draft EU sion to apply a small levy to stock, bond of issuers and investors in order to fully directive, have triggered heated and derivatives trades hardly seems earth- perform their role of financing economic reactions, especially in Britain. Just shattering. So why the hostile reactions? activity and hedging risk. how dangerous – or how beneficial Regrettably, that goal may not be fully – is the so-called Robin Hood Tax? As the economic crisis worsens, pressure attained. Without a proper debate on for the financial world to contribute to a the market model that Europe wants to solution has been building, notably in the adopt to meet the needs of its economy, A bullet aimed at the heart of run-up to the recent G20 summit in Cannes. the Commission’s proposals raise a number London” is how UK Finance Minister For “contribution”, read “taxation”. On 28 of difficulties. These problems are all “ George Osborne describes plans to September the European Commission pub- the more unacceptable because they will tax financial transactions. The Adam Smith lished a draft directive on a common system hamper the process of smooth, harmonised Institute, a free-market thinktank, warns of financial transaction tax (FTT). implementation needed to build an integrated that the City is being hung out to dry. A market. The key issue for AMAFI in the Conservative MP argues that the plan adds months ahead will be to contribute to the weight to a press campaign to get Britain deliberations of European institutions as out of Europe. And even the normally un- 1/2/3_Feature they seek to clarify the legislative framework flappable David Cameron, the UK prime The Not-So-Merry Robin Hood Tax and ensure that it can meet its objectives minister, reportedly pondered asking the 4/5/6/7_News effectively. French if they would accept a cheese tax. International, Europe, France Pierre de Lauzun 8_AMAFI Highlights Chief Executive, AMAFI New members 1 December 2011 Amafi Financial Newsletter No15 France and Germany have to reduce speculation in the international the country was not a member of the single thrown their full weight behind currency markets. In 1989 another Ameri- currency, it still had a responsibility for the the proposal: in a joint letter can economist, Larry Summers, who went success of Europe. to the European Commission, on to serve as Treasury Secretary under their finance ministers, François President Bill Clinton, argued for a “securi- Nevertheless, Europe seems to be moving Baroin and Wolfgang Schauble, ties transaction tax” to curb speculation- closer to an FTT. This raises two major con- said a tax would guarantee a driven inefficiency, reduce the diversion cerns for the financial industry, summed up level playing field worldwide of resources into the financial sector and by Marc Touati, head of economic research and ensure significant reve- lengthen the horizons of corporate manag- at Assya Compagnie Financière. “The big nue-raising potential. But the ers. And in the 1990s the anti-globalisation problem is feasibility. If only a handful of two countries’ efforts to drum movement, notably the Attac association, countries introduce the tax, we will be up wider support have run into founded in France, called for a “Tobin tax” faced with a competitive imbalance. Even tough international opposition – to counter the excesses of finance (though if the aim is to combat speculation, a com- not only from the United States Tobin himself disavowed Attac). In the UK, plex and costly system of oversight will and the UK, which has threat- the supporters of an FTT call it the Robin be needed to distinguish between purely ened to use its veto under the Hood Tax and have mounted a campaign speculative transactions and those that Lisbon Treaty, but also Canada, backed by charities, green groups, trade are economically useful. And assuming Australia, Russia and India. unions, celebrities, religious leaders and that hurdle is are overcome, data collection politicians. The movement calls itself “a and supervision mechanisms will also be Feature The Commission – not origi- force to be reckoned with”. needed, and they too will be costly. If we’re nally an ardent backer of an going to regulate finance, then surely it FTT – claims that 65 per cent of would be better to beef up the existing reg- European citizens support the Divisive issue ulatory framework”. That concern is already proposal and that the tax will materialising. Failure to reach an agreement bring in 57 billion euros annu- The draft EU directive puts forward three at the G20 summit, which merely acknowl- ally without adversely affecting reasons for an FTT: to ensure that financial edged “initiatives in some of our countries the financial industry, which institutions contribute to the cost of fis- to tax the financial sector for various pur- it says is undertaxed. Under cal consolidation, create disincentives for poses”, means that Europe will have to go the directive, stock and bond transaction that do not enhance the effi- it alone. Even so, despite the assurance trades would be taxed at 0.1 ciency of financial markets, and strengthen of politicians such as Wolfgang Schauble, per cent and derivatives at 0.01 the single market by harmonising the exist- the FTT is unlikely to be adopted by all 27 per cent. The tax would apply ing system. An estimated 10 of the 27 EU member states, given Britain’s hostility to to all trading on regulated and member states already have some form the plan – the notorious “bullet aimed at non-regulated markets. At first of tax, although the mechanisms vary and the heart of London”. There is even a lack glance the plan seems benign, are not actually comparable to the FTT of consensus within the euro zone. Aside simple to apply and easy to in practice. The UK for example has the from France and Germany, which are in the defend. But in fact it raises Stamp Duty Reserve Tax, introduced in driving seat, only Belgium, Spain, Portugal plenty of questions, both theo- 1986, which applies to a narrower scope and Finland are openly in favour. retical and practical. of trades than does the EU’s proposal. The pro-Robin Hood Tax camp claim that Brit- The first big question is the very ain already has transaction tax that works. Threat to competition purpose of an FTT. Is the aim Critics of the FTT proposal, who outnumber to stem speculation, raise addi- its supporters, insist that the tax is not only As a result, the riskiest of all scenarios is tional budget revenue or make inefficient but also dangerous. Some point shaping up, namely a decision taken by a the financial sphere contribute to Sweden’s ill-starred experiment with a small number of countries that could affect to solving the crisis? Oppo- securities tax in the 1980s, which led to a their markets and drive investors away. nents say the tax would actually steep drop in trading and a rise in govern- Critics stress that the proposal tabled by increase volatility, reduce liquid- ment borrowing costs. France and Germany could skew the level ity and lead to higher unem- global playing-field. Under their plan, the ployment. Arguments over tax- Whatever the pros and cons, the issue is burden of the FTT would be shared equally ing financial transactions are certainly divisive. In a recent article George between counterparties resident in the EU, nothing new. The idea of an FTT Osborne said that Europe should not be but if one of the parties to a trade is outside has been around for decades. creating new burdens and pointed to the the Union, then the EU counterparty would And it is not a European inven- Commission’s admission that the FTT would stump up for the whole amount. Moreover, tion. In the 1970s James Tobin, cost hundreds of thousands of jobs. And tax experts stress that the yield would fall a US economist and Nobel tempers flared when a senior German politi- short of the Commission’s 57 billion euro Prizewinner, mooted a tax on cian, Volker Kauder, publicly accused the annual revenue target. The narrower the foreign exchange transactions UK of being selfish, saying that even though territorial scope, the smaller the tax base. 2 December 2011 Amafi Financial Newsletter No15 Stéphane Deo, Head of Euro- pean Economic Research at UBS explains, “The FTT’s sup- porters say that one of its pur- poses is to quell volatility. But if investors are deterred, liquidity will decline and that, in turn, Pierre de Lauzun, AMAFI Chief Executive will push up volatility! A side- effect would be to reduce the j What do you think of the FTT plan in its current shape? number of potentially taxable To be effective, a transaction tax would need to be applied on a worldwide basis, and trades.
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