Pensioners Will be Facing a Cold Winter Because of the Financial Transactions Tax

Pensioners Will be Facing a Cold Winter Because of the Financial Transactions Tax

It's crazy to think that a Financial Transactions Tax (FTT) will provide the revenue to solve the world's ills and that it will be a cost borne only by banks, High Frequency Traders, or speculative traders alone. A FTT charge on all transactions in a given market, is nothing more than a politically motivated tax that ultimately impacts the end investors - in market participant terms, that's pension funds and asset managers.

The thing about that is, the asset management industry is already facing the reality of dramatically increased costs and lower returns thanks to the huge payload of derivative reform regulation that is looming (including Basel III, Dodd Frank and EMIR). There will be no 'wriggle room' to absorb the cost of FTT into the fund's charges, so with an additional cost to bear it's not rocket science to expect the return-on-investment to be lower - which will mean less in your pension pot when you want to retire.

Another impact of introducing a FTT will be to reduce trading activity in the market. With less activity in the market (making it a less liquid place to trade) and with execution venues surviving on execution fees, any increase in charges that trading venues place in order to remain viable will clearly multiply the impact on the end investors. That's even less return for the pension funds, which again means less in your pension pot when you retire.

Hitting execution venues like this also raises the spectre of even greater 'social impact' from the less liquid secondary markets; those which support companies listing equity or borrowing via debt markets. A reduction in liquidity in these secondary markets will increase the cost of borrowing, and we can expect some companies to decide that borrowing to finance growth or operation is no longer viable, ultimately meaning fewer jobs, which will impact local economies.

Capital markets are undergoing an unprecedented amount of change to achieve the G20 ambition for more stability, however, much of the change will dramatically increase the cost of operating in these markets. Rather than rushing in further cost increases via initiatives such as the FTT, politicians and regulators should take stock of the market landscape once the existing changes are completed, consider the benefits achieved from those changes, realise the unintended consequences, and then consider what actions are still required. Introducing any measures right now which aim to reduce an investor's ability to get the trade they need, will impact far more than just the speculative market activity they are seeking to control.

Close

What's Hot