Journalists are sometimes guilty of focusing on regulatory processes rather than outcomes. As a new law is being formed, we eagerly follow its progress from proposal stage, through its tortured legislative phases, to regulatory interpretation, but we often lose sight a couple of months after implementation.
Last Wednesday, I moderated a webinar on the evolving market surveillance obligations of financial market participants and how these are impacting the tools, processes and systems that firms need to put in place. The consensus among the assembled panel was that the complexity and breadth of transactions undertaken even by mid-sized and smaller firms meant that existing approaches are rarely sufficient, particularly with regulators taking an increasingly proactive line on market abuse, calling on counterparties to a trade to explain themselves, for example, if they had not reported a transaction as suspicious, when others had.
But a more unexpected insight arose from a chance reference I made to the financial transaction tax (FTT) among a list of potential regulatory threats to liquidity. One of the compliance experts grimaced at the mention of the term, but did not take up the theme during the webinar, knowing that time was tight and that the subject could well take us off-message.
Later he explained the reason for his physical reaction to the mention of FTT. Though applied so far in Europe only by France (introduced last August) and Italy (from March this year), the tax was already eating up untold man hours among compliance and other back-office staff trying to keep track of who should pay, how and to whom.
On the buy-side, investors and asset owners have often assumed they could be exempted from the tax purely by asserting their status, rather than demonstrably proving exemptions. On the sell-side, confusion has also reigned, despite the best efforts of the Association for Finance Markets in Europe to bring some order to the situation be issuing a separate indemnity protocol for the French and Italian taxes that lays out a set of standard provisions. Some European banks and brokers have signed up for one protocol but not the other and claiming exemptions without providing evidence. While US banks are regularly delivering tightly worded legal opinions on why they shouldn’t pay the tax either. At least one firm recently just paid the tax on behalf of a client, simply to avoid the risk of trade failure. It’s no surprise that the FTTs so far implemented have not yet collected the level of revenue anticipated.
Are these just teething troubles that will help to ensure that the pan-European tax proposed jointly by eleven EU countries – but will reach far beyond their borders – will go more smoothly? Or are they a warning that the tax will achieve little more than distracting the financial markets from their proper job of allocating capital efficiently to the wider economy at a time of critical need? All market watchers – not just financial journalists prone to short-termism – should continue to sift for evidence.