At a glance
- The Prime Minister believes the Financial Transaction Tax (FTT) would disproportionately affect the UK's financial services
Explaining his recent decision to veto the new EU treaty, David Cameron said that, while he had “genuinely looked to reach an agreement”, ultimately protecting the UK’s financial services sector had taken priority. Most importantly, Mr Cameron said he could not agree to a European Financial Transaction Tax (FTT), or Tobin tax, as it would hit the UK disproportionately.
Small wonder that the financial services sector played so heavily upon his mind. A lifeblood of the UK economy, it employs two million people and is responsible for 12% of all tax revenues.
So when the two major Eurozone players, France and Germany, refused to accept protections, exemptions and concessions for the City of London in any future EU financial market regulations, it appears that, to the prime minister, at least, he had little option but to walk away from negotiations.
A Tobin tax would hit the UK hardest
So does Mr Cameron have a point?
The FTT is a tax on every purchase or sale of stocks or bonds or other financial product by a bank. However, since 75% of all financial transactions occur in the UK, British-based banks would have paid the vast majority of this proposed tax. Indeed, the European Commission’s impact assessment had shown that, out of the €57 billion it would raise across the EU, €40 billion would come from the UK.
Stuart Fraser, Policy Chairman of the City of London Corporation, echoes Mr Cameron’s position, saying this is not a tax on the EU, but a tax on London. Others add that Mr Cameron’s veto could promote UK financial services and it is now highly unlikely that the eurozone will go ahead with the FTT.
Could the UK be hit with a done deal?
On the other hand, some argue that the veto has isolated Britain, burning bridges and closing doors over future big EU decisions.
The problem with the veto is that Britain may now arrive at the negotiating table in Brussels and be handed a fait accomplit from the remaining 26 EU member states, which cannot be blocked as unanimity is no longer required except in a majority of policy areas.
A better solution may have been to ensure that the FTT did not form part of the treaty, through further negotiations.
Nor is the move of particular benefit to the insurance industry. Some financial services, such as the derivatives market, are unique to the UK and would be subject to a mass exodus should the FTT be passed. Insurance in the UK is better protected as there are similar companies across Europe and excessive regulation would harm markets across the continent.
Other problems exist with the FTT
For better or worse, Mr Cameron will now have to negotiate a working relationship with the EU outside of this treaty, or find a compromise that allows the UK to play some part.
But there are other opponents to the FTT; Sweden, for example, saw trading migrate from Stockholm to London when it introduced its own levy in the mid-1980s.
Should the EU press ahead with its own transaction tax within the 27-country bloc, the “Swedish problem” of migrating trades could be repeated at a global level, as there is little hope the United States or others would follow suit in applying a similar levy.
Couple that with the UK’s clear stance that the FTT will not be allowed in the UK unless it is imposed globally, as well as Ireland’s demand that the tax is to be applied to all 27 states or be dropped, and it is evident that the FTT is far from a done deal.
So how will the FTT fare along a rocky road ahead, and how will the UK be able to influence this post-veto? UK insurers are closely following these issues individually and through working parties at the Association of British Insurers. The coming months should provide us with a clearer picture as to whether the veto was indeed the right decision for the UK financial services industry.