Many thought the dreaded European Financial Transaction Tax (FTT) had gone away, but in January, French and Austrian finance ministers wrote a letter to counterparts in the 11 supporting countries (ECP 11)— Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovenia, Slovakia and Spain—suggesting a revival of the tax, with a proposed arrangement date of January 2016.
Following that initial flurry, things have since quietened down, but, across Europe, opinions differ as to whether the tax will ever come in at all.
So what is the deal?
When it was first mooted in 2013, the FTT caused huge consternation amongst market participants. Yet, despite much noise being made by proponents in the eleven participating countries, things never got beyond the discussion stage, and indeed it was supposed dead and buried.
The proposals in January, however, seem to indicate another rush of blood to get it passed. The main drivers this time around, France and Austria, appear to have made some definite steps towards getting a framework in place, with Austria appointed to spearhead talks, while Portugal, meanwhile, has been appointed to lead the technical discussions.
The timing of the move appears linked to current political trends around Europe. According to Rebecca Healey, a senior analyst at TABB Group, the drafting of the letter is in line with the left-wing political wave that has surged through Europe in the last six months, and has manifested itself with the elections in Greece and Spain.
“It is a handy sop to the left,” said Healey. “I think that’s why it’s been reignited. There is a desire to get something done but when you sit down to the nitty gritty it dissolves. It is disingenuous for politicians to make promises claiming the FTT will deliver when it won’t.”
Apathy prevailing
Overall feeling in the financial industry remains extremely antipathetic towards the FTT. According to the British Bankers’ Association (BBA), the increased cost of derivative trading under the FTT would be so significant it could mean end-users either leaving the risk unhedged or, in extreme situations, deciding to step away from the market altogether if they cannot hedge the risk.
“We believe that the FTT is a retrograde step, contrary to key EU principles of free trade, legal certainty and proportionality,” said a BBA spokeswoman.
“Its further pursuit and potential implementation in any form would prove to be highly damaging to all passive and active participants in financial and capital markets as well as the broader EU economy.”
What then are the chances of it coming in? In truth there remains lack of accord over the details. Despite the political will there are still many complications to overcome.
One of the key issues is how to pass the tax without impacting non-participating states. The UK has been firmly opposed to the tax since it was first mooted two years ago, and launched a failed legal challenge last year against the potential impact on its own industry. The basis of the argument centred on the residency versus issuance principle—namely will the tax be levied in jurisdictions where companies reside or on those where the trades are carried out?
“It’s about where the counterparty is located and the shares you trade,” said Paul Hale, head of tax affairs at the Alternative Investment Management Association (Aima). “In one scenario, the shares being traded are taxed and given to the country where the companies are located. If you’re trading with a UK counterparty it is the counterparty has to calculate tax and pass to country which adds to the burden.”
Power play
There are also significant national interests still in play between the supporting countries. One of the main issues remains agreeing exactly which assets could be included in the FTT. Germany is said to be backing proposals for an FTT on all derivatives, something to which France is opposed. At the same time France also wants exemptions for pension funds as part of its FTT proposal.
Both France and Italy have introduced domestic FTTs in the last three years. France brought in a tax on cash equities in 2012. Average daily turnover in French equities have declined by 2.07% compared to the first six months of that year, and against an overall increase in European stock volumes of 2.18% in the same period, according to Credit Suisse.
Italy introduced an FTT in March 2013 on both domestic stocks and equity-linked derivatives. Anecdotal information suggests this has crushed equity derivative volumes, at the same time as causing severe repercussions for the local stock market. Average daily turnover slumped by 21.63% to August last year, compared to the first two months of the year, according to figures from Credit Suisse.
Critics say that the FTT has failed to raise the proposed revenues in either country. Indeed in France, more sophisticated investors have moved their cash equity investments to derivatives, like contracts-for-difference and equity swaps, to counter the FTT.
“As a result of the FTT, we switched our trading on French equities to derivatives and stopped trading Italian stocks altogether,” said Denis Beaudoin, chief executive at Finaltis, a multi-strategy quantitative fund based in Paris.
“On the equity market neutral side of the business, this has definitely been an extra constraint as it was a pity to lose Italian opportunities. On the buy and hold side, we incur the extra cost, which is passed onto the final investor, not endangering the very nature of the business per se, but taking a toll on final investors’ potential gains.”
However, French asset managers remain concerned about the wider European FTT coming into force, to cover derivatives as well as equities, with the result more and more are looking to move their operations to London, to escape the charges.
“People are concerned,” said Anne-Sophie D’Andlau, founder of CIAM, an alternative manager in Paris. “It gives an unfair advantage to those not in the 11. Most don’t think the UK will ever sign anything and if they do it will be FTT-lite, so are looking to set up there.”
Critical timing
The next three to six months could be critical in seeing whether or not the FTT has a future. One point against it is that the new European Commission Presidency held by Latvia, which came in at the beginning of the year, has shown less interest in the FTT.
“It hasn’t got any faster over the last year because of the EU Parliament elections and the appointment of the new Commission,” said Hale. “There were some delays in that, so even with Italy - which is keen on the FTT - holding the presidency for the second half of 2014, it still didn’t achieve anything. And Algirdas Semeta [European Commissioner for Taxation and Customs Union] has gone too from the Commission who was a big supporter of FTT.”
Another factor remains the UK. While the Conservative government has displayed antipathy towards the tax, Labour is not opposed to the FTT and in 2013 called for the government to support the principle of the FTT and work with other authorities to reach consensus without creating “negative economic consequences.”
With the general election looming in May, the advent of a more left-wing government in the UK could soften the national stance. Healey, for one, believes that nothing should be discounted.
“We shouldn’t underestimate the political will to make this happen,” she said. “There is so much going on in Europe that it could be introduced stage left without anyone noticing.”
Expect things to get interesting one way or another this summer.