Including updates on the financial transaction tax, suitability of complex products and our annual CEO survey


FTT clears first negotiation hurdles

On 22 January 2013, the Economic and Financial Affairs Council (Ecofin) backed plans by 11 Member States, representing around two-thirds of EU GDP, to proceed with a harmonised financial transaction tax (FTT) using the ‘enhanced cooperation’ procedure.

Plans for an EU-wide FTT were stalled last year when a handful of Member States blocked its progress, making it clear that they had specific problems with the proposals. That proposal involved a harmonised minimum tax rate of 0.1% for transactions in all types of financial instruments except derivatives (which would have had a 0.01% tax rate). The aim was for the financial industry to make a fair contribution to tax revenues, whilst also disincentivising market participants from engaging in transactions that do not enhance the financial markets’ efficiency.

After discussions broke down, 11 Member States called on the European Commission to launch an ‘enhanced co-operation’ procedure. Under this, nine or more Member States can move forward on a particular proposal as a last resort if the EU, as a whole, cannot reach agreement within a reasonable period. This is only the third time that an enhanced cooperation has been used and the first time it has been used on a tax matter.

The Council’s decision on 22 January clears an important first hurdle. Member States not participating in ‘enhanced cooperation’ cannot prevent the other member states from pursuing this course. But they can challenge it on the basis that it poses a threat to the single market, or to economic, social and territorial cohesion, or if it might distort competition between Member States. The Council vote passed by qualified majority. A number of countries, including the Czech Republic, Luxembourg and the UK, abstained from the vote due to insufficient data on the FTT’s impact on the financial systems of non-participating countries and the single market as a whole.

Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain are all participating. Other Member States are free to join at any time. Some are considering it (e.g. the Dutch government wants pension funds to be exempt from an FTT before joining up); other countries have completely ruled it out due to international competitiveness concerns (e.g. the UK). Algirdas Šemeta, EU tax commissioner, called the Council’s decision a “milestone in global tax history” and might encourage other regions to make similar moves. It’s also a milestone for EU taxation policy, and paves the way for further harmonisation across Member States on fiscal and taxation policy (such as on corporate tax rates), even in areas where unanimity cannot be achieved. The enhanced cooperation should provide the necessary legal framework for the establishment of a common system of FTT in the participating Member States and ensure that the basic features of the tax are harmonised to reduce tax arbitrage as well as the possibilities for double, non-taxation and tax evasion.

Within the next few weeks, the EC will draw up a legislative proposal on the FTT which will be drawn largely from its original proposal, possibly subject to a few adjustments:

  • the addition of the issuers principle to the residence principle
  • a single and lower tax on repos
  • an exemption for the sale of UCITS shares/units.

But, after this proposal has been tabled, it’s the participating countries responsibility to discuss and agree on the scope and objectives of the FTT they want to implement. So far two camps have emerged:

  • Proponents of a French/ UK stamp duty style tax on shares, plus derivatives on shares, an exemption for government bonds, an exemption for the issuance by UCITS, a single and lower tax on repos, the addition of the issuers residence principle (as was proposed by the European Parliament) and a clause to require review by the EC in a couple of years. This group includes France, Italy and Spain.
  • Proponents of a more ambitious proposal which stays true to the EC’s original proposal and goes further than just a stamp duty. This group includes Greece and a number of Eastern European countries who want to maximise FTT revenues.

Importantly, Germany hasn’t made public its position but it appears that the French/ UK stamp duty style FTT approach will win-out in negotiations given the current level of support. Proponents of this approach are willing to review a FTT in the near-future with the potential of widening its scope in line with the other camp’s proposals. Adopting a ‘FTT-light’ model to begin with seems a sensible approach because it’s still not clear how successful the FTT will be and what impact it will have on financial markets.

Michael Sell, Head of the Tax Department at the German Federal Ministry, does not expect revenue from an FTT before 2016. Sell believes that it could take 18 months to come to a final agreement plus a further 18 months lead time. Reaching agreement on a very light version of FTT ahead of Germany’s general elections may not be politcially expedient from Chancellor Merkel’s perspective as it could be dismissed subsequently by the opposition Social Democratic Party as not substantial enough. However, Pierre Moscovici, the French Finance Minister, has suggested that the FTT may come into effect as early as 2014.

Any substantial delay or difficulties with the negotiations could result in more countries introducing their own local FTTs (following the lead of France, Italy and others) in the mid-term, frustrated by the lack of progress in Brussels. While this patchwork approach is sub-optimal it could provide us with better data on how financial markets operate under a FTT, which hopefully, will inform how the harmonised tax is ultimately calibrated.


IOSCO finalises global suitability and disclosure principles for intermediaries

Stories of inappropriate products being sold to financial consumers have been all too common since the crisis. Regulators and enforcement authorities have come down hard on financial institutions and intermediaries on the basis that they should have done more to ensure that their consumers— both retail and institutional—understood the risks associated with their investments.

The collapse of Lehman Brothers in September 2008 highlighted the extent to which intermediaries failed to assess the suitability of structured investment products for retail and institutional customers. More generally, the crisis raised concerns that the growing complexity of financial products has made the associated investment risks even less apparent to customers.

Although complex financial products may not be necessarily more risky than standard financial instruments, they typically have terms, features and potential investment risks that are difficult for many customers, even non-retail customers, to appreciate fully.

In response, some regulators, such as the UK’s Financial Services Authority, have introduced stringent regulations surrounding the selling of investment products, including bans on commissions by product providers, requiring those who sell products to be qualified and requiring financial intermediaries to disclose whether they are providing ‘independent’ or ‘restrictive’ advice. Some other European regulators are moving in a similar direction.

At a global level, IOSCO issued its final report, Suitability Requirements with respect to the Distribution of Complex Financial Products on 21 January 2013 as part of its “ongoing drive to promote customer protection” and raise the bar on business conduct risk.

The report sets out final principles relating to the distribution by intermediaries of complex financial products:

  • Classification of customers: intermediaries should adopt appropriate policies to distinguish between retail and non-retail clients.
  • General duties irrespective of customer classification: intermediaries should be required to act honestly, fairly and professionally and take reasonable steps to manage or mitigate conflicts of interest.
  • Disclosure requirements: customers should receive or have access to material information to evaluate the features, costs and risks of the complex financial product.
  • Protection of customers for non-advisory services: where no management, advice or recommendation is provided, the regulatory system should provide for adequate means to protect customers from associated risks.
  • Suitability protections for advisory services (including portfolio management): intermediaries should have sufficient knowledge to ensure that their investment advice is based on a reasonable assessment of the structure and risk-reward profile of the financial product and that it is consistent with such customer’s “experience, knowledge, investment objectives, risk appetite and capacity for loss”.
  • Compliance function and internal suitability policies and procedures: intermediaries should establish a compliance function and “develop appropriate internal policies and procedures that support compliance with suitability requirements”, including when developing or selecting new complex financial products for customers.
  • Incentives: intermediaries should be required to develop and apply appropriate incentive policies designed to ensure that only suitable complex financial products are recommended to customers.
  • Enforcement: regulators should supervise and examine intermediaries on a regular and ongoing basis to help ensure firm compliance with suitability and other customer protection requirements relating to the distribution of complex financial products.

IOSCO will leave it up to national regulators to integrate these principles into their regulatory framework. A number have already done so.

However, the experience of recent years has shown how difficult calculating the risks associated with complex products is. Such regulatory initiatives may encourage product simplification. However, this is not the purpose of these recommendations: IOSCO wants to reduce the asymmetries of information between sellers and buyers of complex products to reduce, amongst other things, the possibility of mis-selling.

IOSCO’s final principles, therefore, should be welcomed. Better quality information and financial advice across all financial markets will help minimise poor investment decisions, result in better outcomes, and help restore confidence in the merits of investing in financial markets.


State of the financial system: On the front foot

Our 16th annual global CEO survey (2013) was published this month to coincide with the economic summit in Davos. The survey offers some interesting perspectives on the challenges and opportunities facing CEOs of the world’s largest companies. You can download the full report here.

As regulatory policy making doesn’t occur in a vacuum, we have provided a high-level summary of the key results and trends, including economic, operational, strategic as well as regulatory, as they pertain to the asset management, banking/capital markets and insurance sectors.

Our key findings in the asset management sector is based on interviews with 108 Asset Management CEOs in 109 countries, as well as in-depth interviews with a number of CEOs at international asset management firms. Trends in banking/ capital markets are based on survey responses from 149 industry leaders in 49 countries, along with in-depth interviews with CEOs from seven global banks. Finally, we drew from survey responses from 92 insurance leaders in 39 countries to inform our findings on the insurance sector.

Asset Management

Confident outlook: After plumbing the depths last year, CEO anxiety about the global economy is lifting. 78% of CEOs anticipate growth in the next 12 months in their own business and 86% predict growth over three years, reflecting the likely improvement in economic conditions.

Industry in transformation: Two-thirds of CEOs intend to make changes to their firms’ strategies over the coming 12 months. CEOs know they need to reshape what they offer investors in a risk-averse, low-growth world where investors are asking for fresh ideas.

Uncertainty over regulation: Seventy-one per cent of CEOs named over-regulation as a threat. Many alternative managers will be regulated for the first time under Dodd-Frank and Alternative Investment Fund Managers Directive. And regulators are debating curbs on ‘shadow banking’ activities, while Basel III’s higher bank capital standards and OTC derivative controls are affecting investment strategies. CEOs are sceptical about the benefits of regulation, only 13% thought that government had reduced the regulatory burden.

Emerging market expansion: CEOs are looking to emerging markets to supplement growth in their home markets, whether through setting up local operations or attracting assets from local institutional investors such as sovereign wealth funds. They have the highest hopes for the Middle East, India, Latin America and Southeast Asia.

Competition for talent: CEOs see talent management as an increasingly important area for refining strategy; with 73% of those CEOs planning to change strategy anticipating doing so in this area.

Banking/ capital markets

On the way up: CEOs are confident about their companies’ prospects – nearly 90% are looking ahead to an increase in revenue growth over the next year.

Regulatory burden: Ninety-five per cent of banking and capital markets CEOs continue to say that governments and regulators influence their strategy, almost as many as customers (97%). This is reflected in concerns about growth due to excessive regulation (81%), protectionist policies (50%), the tax burden (59%) and government response to debt and fiscal burden (67%). Industry leaders are continuing to strengthen engagement with government and regulators (77%).

Shifts in consumer behaviour: Half of banking and capital market CEOs are concerned about shifts in consumer spending and behaviour, though these developments offer opportunities for nimble and innovative players. Nearly 90% of industry leaders are planning to change their strategies for customer growth, loyalty and retention, with more than 30% of them anticipating a major change.

Technology still a changing force: Developments in technology are changing how products are designed and distributed and could open the door to new entrants. Nearly three-quarters of banking and capital markets CEOs are planning to increase investment in technology and more than two-thirds plan to strengthen their capacity for innovation.

Cutting the fat: Improving operational effectiveness is a top three investment priority for 58% of CEOs. More than 60% are planning a cost reduction initiative over next 12 months and more than 70% anticipate a change in their organisational structure.

Getting the right skills: More than half of CEOs continue to see the availability of key skills as a threat to growth. Nearly 70% of industry leaders are striving to match pay of peers to retain top talent. However less than a quarter are planning to invest in filling talent gaps.


Confident outlook: Insurance CEOs are upbeat about their companies’ prospects – nearly 90% are confident about revenue growth.

Standing still: Only 16% of CEOs are planning for the fundamental strategic shifts that are likely to be required in this sector. This raises some questions about whether their organisations are moving quickly enough to keep pace with the accelerating and potentially disruptive changes in the marketplace.

Consumer expectations: More than half of industry leaders expressed concerns about the shift in consumer spending and behaviour. Nearly 90% of insurance CEOs are planning to change their strategies for managing customer growth, loyalty and retention.

Comfortable with technology: More than 80% of insurance CEOs are planning to increase investment in technology and more than 60% plan to develop their capacity for innovation. Perhaps surprising, most industry leaders say they are not concerned about the speed of technological change or the threat from new entrants.

Gran Esperanza: The focus on expansion in a range of largely under-penetrated emerging markets is reflected in the fact that Latin America (88%) tops the list of the regions earmarked for growth over the next 12 months, with most parts of Asia also scoring more than 80%. However, noticeably fewer insurers are targeting growth opportunities in Africa (67%) than their counterparts in banking (88%).

Competition for talent heats up: Insurance CEOs see the limited availability of key skills as the biggest threat to growth. Nearly 80% are planning to change their strategies for managing talent as a result, with nearly 30% seeing filling talent gaps as a top three investment priority.

Competitive culture: Cutting across these competitive developments is the need for a cultural shift as insurers strive to rebuild public trust – 55% of insurance CEOs are concerned about lack of trust in the industry.

Government influence: Ninety-five per cent of insurance CEOs say that governments and regulators influence their strategy, almost as many as customers (99%), though far fewer are looking to engage more closely with government (76%).


CEOs across all financial markets need to understand the potential implications of the complex set of changes taking place in their markets, among their stakeholders as well as in their own organisations. They have to change and adapt accordingly.

Proactively managing regulatory challenges, non-performing assets or businesses, and adapting to changing technologies and customer expectations will create a much stronger position than those that simply seek to muddle through in anticipation of better times ahead.

The businesses that come out on top will be sharpening customer-centricity and have a superior capacity for innovation and constant reinvention.

But success may be elusive - the financial industry faces the headwinds of a challenging global economy, low interest rates, higher capital demands, lower rewards with which to attract talent and increasing regulatory constraints on business.

In Europe, regulatory change is overwhelmingly perceived as a considerable threat to growth. The regulatory agenda for 2013-2014 is set to maintain – or even increase – the high levels of activity of the past few years against the deadline of the European Parliamentary elections next year. Besides all the legislation currently being negotiated at the EU level, new proposals are expected this year including legislation on a European Resolution Mechanism (to supplement the three pillars of EU banking union which are currently under negotiation), money market funds and basic bank accounts and payments systems. These new proposals will continue the pressure created by the introduction of the single supervisory mechanism and the ‘single rule book’ including the overhaul of prudential regimes (CRD IV and Solvency II), and all the legislation responding to G20 commitments that is already in progress.

Financial institutions will need to make sustained implementation efforts over the coming years against the backdrop of anaemic economic growth prospects in the EU and elsewhere, fragile financial markets and ongoing deficit-reduction efforts in some economies. We are in uncharted territory here – our financial institutions will need strong, resilient leadership to face the economic and regulatory challenges ahead.