The design of the financial transaction tax (FTT) is inferior, and risks leading to more risky behaviour by discouraging trades, the European Commission has been told.
Pension funds, industry bodies and EU governments rallied against the FTT, which is being pursued by a minority of 10 EU member states under the enhanced cooperation procedure.
The comments come as the European Commission gathers opinions on how it should improve financial regulation introduced since the 2008 financial crisis, and saw the Czech Republic’s Ministry of Finance warn that the tax poses an “existential danger” to efficient capital markets.
Denmark’s largest pension fund, ATP, said the tax was of “inferior” design and that its application would have an unpredictable effect unless the number of transactions it covered were scaled back significantly.
ATP, which suggested the Commission evaluate all regulation against five criteria – transparency, liquidity, externality, diversity and financial stability – said the tax would impact four of the five areas negatively, only leading to increased transparency.
It said the tax would lead to reduced liquidity and see investors taking on more risks to balance out the costs associated with the FTT.
The Dutch Pensions Federation shared ATP’s concerns over risk and continued to resist the introduction of the tax.
The industry body argued in its submission that recent financial market regulation focused on risk management, while using instruments such as derivatives to reduce risks.
“A potential FTT – i.e. a tax on derivatives – would discourage their use for risk management by pension funds,” it said. “If left unaddressed, effective risk management by end-users of financial markets will be more difficult.”
Contradicting the Capital Markets Union
Eumedion, the Dutch corporate governance forum, and the Spanish pension fund association (INVERCO) warned that the introduction of the FTT was at odds with the intent of the Capital Markets Union (CMU) to reduce barriers to capital flow, a point previously raised in a report commissioned for the French government.
Eumedion suggested that, even with the FTT’s more limited scope, agreed by participating countries in early December, the levy could still discourage investors from holdings stakes in companies based in participating countries.
INVERCO said the FTT would amount to an “indiscriminate tax on savings” and that it risked increasing the cost of fund investments, meaning capital would either be channelled through insurance contracts, deposits or funds based outside the FTT’s catchment area.
The Federation of Finnish Financial Services (FKI) echoed the Czech Republic’s concern that the tax could lead to impaired financial markets, while it raised the possibility that trades would simply move to countries outside the FTT zone.
It warned of the “direct” impact for Finland’s pension sector, by lowering returns across the industry.
“Costs of the tax would have to be covered either by raising pension contributions or by lowering pension benefits,” the FKI predicted.
Until late 2015, 11 EU member states were pursuing the FTT.
Estonia eventually withdrew its support, leaving the governments of Austria, Belgium, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain as supporters.