Over the last few months, reading the press reports of proposed EU measures to shore up the financial services sector has had me totally muddled. And not because I am confused…
In posts earlier in the year (here I muse that we don’t need more FS regulations, simply to enforce the current ones more effectively and here I question what the impact might be of the proposed regulations on the existing financial centres) I tried to ask pretty obvious questions that anyone that understands financial markets might reasonably ask.
We all know that rules and laws can have myriad unintended consequences, but in financial services, there are also a lot of quite obvious consequences. And at last, I see someone discussing them.
In this article on EU policy website EurActiv is a telling quote. “A diplomat from a large EU member state said that without an international consensus on the FTT, banks would “start doing all their transactions from London or New York, or the Galapagos”.”
That pretty much sums up the problems faced by regulators that are trying to ‘tax’ financial transactions, banks, or whatever else might seem appropriate. Unless the regulators can bring into line every single legal jurisdiction on earth (which I sincerely hope they cannot, it would make the world a very boring place) they cannot enforce these rules. There just needs to be one small island in the South Pacific (or wherever) and the majority of financial transactions will be conducted ‘from’ there.
We all know that in the modern connected world, financial and banking transactions can be virtually conducted from anywhere. Maybe even the Galapagos…
I can recall reading some years ago about a ‘tax haven’ that existed in the Indian Ocean. I cannot recall the details, but it was in the vicinity of the Maldives. This tax haven was a sandbar that only appeared under certain tidal conditions. It had no buildings and no residents. But there were something like 15 banks using it. I’m sure they have mostly (or all) been closed now. The book I was reading suggested that they were primarily there for money laundering purposes as passthrough banks owned by drug cartels.
But still, the point is valid. Look at the behaviour of Enron if you need an example of corporations using the unregulated ‘offshore’ world. If a new regime of taxes on transactions or bonuses or new fees is implemented, the investment banking community may well simply up sticks and move to somewhere more friendly (cheaper).
Somehow - and I do not propose to have the answer - we need to find a balance that keeps the financial services sector in London, Paris, Frankfurt and others whilst also reigning in its worst excesses. This will not be an easy balance to strike, but I would suggest that a small army of financial regulators paid to enforce existing rules will be more useful than a round of taxes that drives everyone away to play on a pitch with no rules.