EUROPE – The proposed financial transaction tax (FTT) risks running counter to the EU's freedom of movement of capital, a new report by brokerage firm ICAP has warned.
In a separately released report, the International Capital Market Association (ICMA) also warned of "serious problems" for EU governments as well as institutional investors looking to use the capital debt and repo markets.
ICAP stressed that treating overseas branches of firms impacted by the FTT less favourably than those operating through subsidiaries was not compatible with the freedom of establishment, a core element of the Union's single market. The firm insisted that the proposed FTT appeared therefore to run counter to established EU Treaty freedoms.
Additionally, ICAP claimed that even though the FTT proposal included an exemption for issuers of public debt, it did not seek to safeguard secondary market trading of the debt, which could increase the cost of funding and capital burden for governments.
ICAP also denounced the fact that, while the UK was not one of the countries seeking to adopt the FTT, economic activity located in the UK was likely to be among the largest generators of FTT revenue – and that the revenue would be paid to authorities in FTT countries rather than the UK government.
Michael Spencer, CEO of ICAP said: "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."
The comments made by ICAP follow on a series ofcomplaints by the British industry. Last week, the City of London Corporation argued that member states not participating in the FTT – such as the UK – could be more severely affected, in the UK's instance due to companies greater reliance on the bond markets over bank loans.
Additionally, ICAP stressed that the FTT would "significantly" raise costs for corporates and would push many firms around the world to undertake "major" systems change in order to be able to collect the tax as there is currently no collection mechanism in place.
The firm finally warned against the risk of introducing the FTT for repurchase (repo) transactions as this would "significantly" increase banks' short-term funding costs.
According to ICAP, the additional costs would "almost certainly" be largely transmitted to the private sector, resulting in negative effects on investment, employment and output.
Another study conducted by the ICMA echoed the sentiment, revealing that the FTT would cause the short-term repo market in Europe to contract by at least 66%.
According to the ICMA, the loss of repo and the lack of an alternative secured financing instrument would pose "serious problems" for institutional and corporate investors, who would be forced into unsecured deposits, not subject to the FTT.
"Lending by banks to industry would be compromised by banks being unable to readily borrow from institutional investors and manage their liquidity in the interbank market," the association said.
"The absence of an efficient repo market to underpin primary and secondary debt market activities would make it harder for financial institutions and firms in the real economy to raise adequate capital from banks but especially for non bank investors."
The ICMA therefore called on policymakers to exempt the repo and securities lending markets from the FTT, arguing that repo market was "crucial" to the efficient functioning of almost all financial markets.
In January this year, EU finance ministers gave 11 member states permission to implement the FTT