The EU priorities of sustainable growth and high-quality regulation are supportable, but an FTT would harm securities trade

The Finnish Government has outlined its long-term goals for Finland’s EU policy. Finance Finland (FFI) agrees with the government’s goals of supporting sustainable growth in the EU and improving competitiveness and resilience against crises by further developing the European single market. The EU needs to succeed in utilising digitalisation and mitigating climate change, and a strong Economic and Monetary Union is an important part of this.

FFI is involved in creating a strategy for sustainable finance and considers sustainable finance an important aspect of the shift towards climate-neutral economy.

Before the Banking Union is completed, the issues of unhealthy banks must first be solved. The pandemic has made their situation even worse. Investor bail-in must be the primary source of funding in crises, while the Single Resolution Fund must be only the last resort.

Regulation of the Digital single market must be equal between different sectors and actors. Regulation should be an enabler for new innovative business models. It must not stifle new business.

Transparency is important in EU legislation, and FFI is committed to transparency in its own activities.

Legislation must be functional, proactive, and of high quality. The necessity of new regulation must be critically evaluated.

New taxes are not a good funding instrument for the EU. Granting the EU taxing powers would be a fundamental change in the Union’s principles.

A financial transaction tax (FTT) is being planned in the EU. The FTT would make financial intermediation more expensive and shift trade to markets and instruments outside the scope of the tax. The FTT would also reduce profits of the Finnish employee pension system.

The financial sector has an important role in revitalising the European economy. The EU is currently targeting the financial sector with wide-ranging, long-term regulatory projects in order to reach the above mentioned goals. Financial sector regulation is often directly related to how companies in the sector can serve their customers or, for example, offer corporate financing in the current challenging situation.

“Financial sector companies have to take a lot of time to understand how regulation affects their operations. This competes for their resources for providing their services and managing their customer relationships”, notes Mari Pekonen-Ranta, Director of EU Affairs at FFI.

Pekonen-Ranta also points out that EU regulatory projects must support equal competition between actors inside and outside of the EU.

“Financial sector companies have to take a lot of time to understand how regulation affects their operations. This competes for their resources for providing their services and managing their customer relationships.”

MARI PEKONEN-RANTA, Director of EU Affairs

Disadvantages of the FTT would surpass its benefits

It is also time to set EU-level policies on how everything is to be funded. In FFI’s opinion, taxing powers and decisions on taxation should be left with member states themselves. Setting new taxes and granting the EU taxing powers would be a major, fundamental change in the operating principles of the EU.

One of the planned funding instruments, a financial transaction tax (FTT), would increase the costs of financial intermediation, and trade would move into markets and financial instruments that are outside the scope of the tax. The tax would reduce the profits of Finnish earnings-related pension funds.

“The FTT has been in the planning for a decade. The tax would carry significant negative effects on securities markets and the Finnish pension system, among others. The risk is that the FTT would reduce the volume of trade in the markets and thus cut liquidity and the price of securities.”

PIIA-NOORA KAUPPI, Managing Director

A tax such as the FTT cannot be implemented in individual member states, because trade would only move elsewhere. Sweden’s attempt at implementing a financial transaction tax some decades ago caused a drop in share prices and trade volumes, and the country eventually dispensed with the tax. Even an EU-wide tax could cause trade to shift outside of the EU.

“The UK and Brexit are a big question mark in the context of an EU-wide financial transaction tax: although the UK’s status as a financial centre has weakened after Brexit, the FTT would improve the competitiveness and attractiveness of the London financial market at the expense of EU financial centres”, says Piia-Noora Kauppi, FFI's managing director.

The implementation of a financial transaction tax is not warranted. The disadvantages of such a tax surpass its potential benefits. If the implementation is nevertheless to be further explored, the tax should be global and its development should involve entities such as the OECD.

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