FTT an 'obstacle' to Capital Markets Union, experts warn European Commission

The financial transaction tax (FTT) proposed by a minority of European Union countries could act as a significant obstacle to the success of the Capital Markets Union (CMU), asset management and pension fund associations have warned.

In responses to the European Commission’s green paper on the CMU, the European Fund and Asset Management Association (EFAMA) and the Investment Association, its UK counterpart, warned that the FTT could be counter-productive and act as a potentially significant obstacle to success.

Concerns were shared by the UK’s National Association of Pension Funds (NAPF), which argued that it would be hard to contain the impact of the FTT to the 11 European countries that have agreed to introduce it, as the initial proposal from 2012 would have seen the fee levied when UK investors acquired shares in German or French firms.

It added that two NAPF members estimated that the FTT would see increased transaction costs of €35m and €5m, respectively, although it did not disclose the size of the pension funds in question.

“The NAPF accepts there is a case for tackling some aspects of market behaviour to encourage long-term responsible investment,” the organisation said in its consultation response.

“But better stewardship, not a new tax, is the best way forward.”

For its part, PensionsEurope had previously warned the Commission that it should avoid any measures – including the FTT – that would “lock capital in the pension funds”.

The Investment Association also warned that the impact of the FTT could spill over into capital markets not participating in the levy.

It said the tax would introduce “distortions in the capital markets across the EU” – counter to the purpose of a more unified CMU.

EFAMA echoed the concerns, noting that the distortions would see capital flow predominantly towards countries not participating in the tax.

“FTT would increase the costs for investors, as it will render EU investment funds more expensive,” it said.

“It would also jeopardise long-term savings, growth and investment, as it would channel investments to products not subject to FTT.”

While negotiations between the 11 participating member states have been slow to see progress, and the introduction of the FTT, the Association of the Luxembourg Fund Industry previously warned of the “nightmare” scenario that would occur if the joint proposal failed and saw 11 individual taxes launched.