The Great Debate UK
–Tanuja Randery is the CEO of trading services firm MarketPrizm. The opinions expressed are her own.—
As the economic downturn continues to drag on, the cynics amongst us might be forgiven for thinking that the “Tobin Tax” is a move by politicians to curry public favour by taking punitive measures against the financial services sector.
On 14 February, 11 out of the 17 euro zone nations agreed to implement the Financial Transaction Tax (FTT), a tax on bond, equity and derivatives transactions, in January 2014. Two countries have already rolled it out — France, last August, and Italy, which followed suit on 1 March this year. The UK, Netherlands and Sweden are all strongly opposed.
On the face of it, the FTT appears small — 0.1%. However, the tax is cumulative and cascading, affecting a chain of trading and clearing including vendors, brokers and clearing members. Each sale along the chain will be taxed. Also, the tax will be levied on any bank registered in a country that does apply the tax, even if the transaction takes place in a country that hasn’t implemented it. This means that if a UK bank does a trade with an Italian bank, they will be taxed twice, with both the UK’s domestic stamp duty as well as the FTT.
So keen is the British prime minister to airbrush out his decade as a "light touch" finance minister that he embraced the heretical idea of a levy on financial transactions as one way to make banks pay for future bail-outs -- the so-called Tobin tax.
No longer just a hopeless cause for anti-capitalist activists, the idea of a global tax on financial transactions is gaining ground in Europe.
European Union leaders could not agree to put it on the agenda of this week's G20 summit on reforming the financial system in Pittsburgh, but the leaders of France, Germany and the European Commission endorsed the concept.
More strikingly, the head of Britain's Financial Services Authority, which regulates the world's second biggest banking centre, said last month that such a levy could help shrink a swollen financial sector.
So the watchdog can bark after all. Adair Turner, chairman of Britain's Financial Services Authority, says the financial sector has "swollen beyond its socially useful size". That is a striking statement for any financial regulator, particularly one that counts promoting London's financial centre as one of its goals. Identifying the problem, however, is the easy bit. Reversing decades of financial expansion will require global agreement on tough new rules, and the determination to make sure they are consistently enforced.
Turner's comments, in a debate hosted by Prospect magazine, underscore the extent to which the crisis has upended the received wisdom among policymakers. For years they assumed markets were self-correcting, that financial innovation brought lasting economic benefits, and that regulators should think twice before getting in the way.