The European Commission’s approach to the enhanced cooperation behind the Financial Transaction Tax (FTT) has been “unjustified and misconceived”, according to a UK House of Lords committee.
The Economic and Financial Affairs Subcommittee of the House of Lords EU Committee issued its report, Financial Transaction Tax: Alive and deadly, on 10 December following the release of its initial thoughts on the tax in March. The European Commission outlined the details of the FTT in February.
The report blasted the 11 member states’ decision to move forward with the FTT under enhance cooperation, which is an extraordinary procedure that EU countries can use if broad agreement on a rule or law is impossible.
Enhanced cooperation has been used to create an EU-wide patent system, and in the field of divorce law. The 11 countries going ahead with the FTT are Germany, France, Italy, Spain, Belgium, Austria, Portugal, Greece, Slovenia, Slovakia and Estonia.
The Lords committee is worried that European Commission has ignored the effects that the FTT could have on non-participating EU member states, including the UK.
A Council Legal Service opinion, issued in September, concluded that the proposal does not comply with EU law, while the Lords committee rejects the artificial distinction between the FTT’s imposition and its collection, “which the commission draws in order to play down the impact of its proposal for the 11 participants on the non-participating majority of member states”.
The report said: “We believe that impact would be considerable. The tax would have to be levied in the UK on behalf of the 11, with potential damage to our markets but no benefit to the exchequer. All EU markets would suffer if, as we think likely, the effect were to drive transactions offshore.”
The Lords committee slammed the commission’s approach to enhanced cooperation, which it described as “unjustified and misconceived”.
“This approach undermines the commission’s obligations to defend the interests of participating and non-participating member states alike. We were surprised by the commission’s assertion that its proposal was deliberately radical, with the intention that the participating member states could cut out what they disliked.”
The UK government was next to be criticised, because of its “diffident approach” to the FTT and a reluctance to listen to the committee, all of which has been “deeply frustrating to witness”.
“It was only after constant and repeated warnings on our part that the government finally awoke to the serious threat to the UK’s, and the broader EU’s, interests that an FTT pursued by other member states might present.”
The Lords committee backed the UK government’s decision to challenge the legality of creating the FTT under enhanced cooperation. It filed a complaint with the Court of Justice of the EU in April.
Lord Lyndon Harrison, the committee’s chairman, said: “The committee is still firmly of its original view that an EU Financial Transaction Tax is flawed and potentially damaging to the economic well-being of the UK.”
“What we now have before us is a proposal to allow a breakaway group of EU countries to proceed with their own FTT, which would have a serious negative impact on the UK and other non-participants.”
“The Commission has a duty to all 28 of its member states equally, and this sort of cavalier approach to legislation risks making losers of us all.”
One commentator warned in June that the FTT could have a damaging effect on returns and prevent securities finance participants from making a profit.
Repo markets would be the hardest hit, said the commentator, with an estimated cost of €198 billion to Europe's largest banks. The short average duration of repo transactions make them particularly susceptible to the tax, he explained.
He added that proposed exemptions to the tax, including collateralised loans, central bank funding and central counterparties, could become a focus for business.
The International Securities Lending Association is also fearful. In June, it said that the tax could “close down” the securities lending market.
“At least 65 percent of the European securities lending market would disappear as a result of the FTT.”
It noted that more than €2 billion of revenue would be lost to long-term investors, while close to €500 billion of EUR government bonds would be removed from the lending/ collateral markets.
Shorter dated transactions would be disproportionately affected, increasing the risk of settlement fails by possibly as much as 100 percent, and securities lending fee levels would need to increase by more than 400 percent just to maintain current revenue streams for long term institutional investors.
The real problem with the FTT is that it would hit pension funds and savers in the UK, not just in the 11 participating member states, according to James Walsh, policy lead for EU and international matters at the National Association of Pension Funds (NAPF), who spoke in response to the Lords committee's report.
“The FTT would apply when UK pension schemes buy shares in companies or do business with banks based in the 11 FTT Member States.”
“EU policy chiefs should be looking for ways to encourage saving and extend workplace pensions to the 60 percent of EU citizens who currently have no access to one. Taxing saving more heavily will not help.”
