Editor's note

Chairman of the UK Financial Services Authority, Mr. Adair Turner supports the idea of new global taxes on financial transactions. He warned that a “swollen” financial sector paying excessive salaries has grown too big for society.

The head of Britain’s top banking watchdog says the debate on bankers’ bonuses has become a “populist diversion” and that more drastic measures may be needed to cut the financial sector down to size, writes George Parker in Financial Times’ article “FSA backs global tax on transactions” (August 27 2009).

Lord Turnes also says that the FSA should “be very, very wary of seeing the competitiveness of London as a major aim”, claiming the city’s financial sector has become a destabilizing factor in the British economy. His comments may be read in other financial centers, including New York, as a sign that Britain is becoming increasingly skeptical about the perceived advantages of being a leading financial centre.

Lord Turner’s suggestion that a “Tobin tax” (named after the economist James Tobin) should be considered for the global financial transactions as well. The proposed tax, which has previously been championed by development economists and the French government as a means of funding the developing world, has been fiercely opposed by the finance industry.

Note: It was Jacques Chirac, the former French president, who proposed in 2005 a “Tobin tax” on financial trans­actions to address the ex­cesses of “liberal globalization” his ideas were scorned by Britain. Times have changed since then. Today the man charged with regulating the City of London makes exactly the same suggestion, arguing that such a tax might help to curb excessive pay, profit and activity in a “swollen” financial sector.

Lord Turner rises his doubts about a return to “business as usual” in the banking sector after the crisis are over, suggesting that new taxes may be necessary to curb excessive profits and bonuses in the financial sector. In order to stop excessive dividends, he argued, it is necessary to reduce the size of that sector or apply special taxes to its pre-remuneration profits.

The FSA chairman also claims that parts of the financial services sector had grown “beyond a socially reasonable size”, including derivatives and hedging and aspects of the asset management industry and equity trading.

The FSA’s main tool, according to Lord Turner, will be -through additional higher capital requirements- to eliminate excessive activity and profit; the tax on transactions on a global level may be an additional option.

Government officials, e.g. Alistair Darling, chancellor, said no such taxes were under consideration. Mr Darling insists that the banking industry in London should continue to play a leading role in global finance.

Angela Knight, chief executive of the British Bankers’ Association, also defended the financial industry’s role in the economy saying the sector was a main provider of jobs and tax revenues and could be undermined by the wrong kind of taxes or regulation.

However, Lord Turner’s idea of imposing new global taxes on a financial sector struggling out of its deepest crisis in the postwar period was not well received.

“This isn’t on the table,” said one government official at the end of August. “If Adair Turner has views on tax policy, perhaps he should go and work in the Treasury.”

He argues that parts of the financial industry have grown “beyond a socially reasonable size” and that London’s competitive position should not be defended at any cost.

To illustrate his point he looks at growth in the share of gross domestic product made up of wholesale financial services and considers “what percentage of highly intelligent people from our best universities went into financial services”.

The trouble is that financial intermediation today is a more complex thing than a decade or two back. Lord Turner’s suggestion of a Tobin tax to rein in excessive profits may turn out to be about as successful as Mr Chirac’s failed initiative. The FSA chairman admits that a global agreement would be “very difficult to achieve”.

Turner’s stark warning illustrates a wider fear among some regulators that the easing of the financial crisis has bred complacency and that tough measures still need to be implemented.

World leaders will consider the progress made in tightening up banking regulation in September at the G-20 summit in Pittsburgh.

Opposition in the UK towards Lord Turner’s plan goes in line with the idea to scrap the FSA and merge its regulatory functions with the Bank of England. There are some examples in other EU states and opponents in North America: Spain rode out the crisis reasonably well with a bank super­visory system allied to its central bank; Canada’s apparently sound banking system was overseen by a regime that separated central bank and bank super­vision.