Lord Turner chairman of the FSA has been widely reported (and misreported) in the past few days in relation to tax aspects of proposed bank reforms.
In an interview with the FT, Lord Turner was asked about the Government’s proposal to force banks to to draw up plans (living wills) for an orderly wind-down in the event of failure; this is in line with the global drive for “resolution regimes” for the biggest banks, post-Lehman. The idea is that governments around the world will require banks to clarify and simplify their legal structures in order to avoid any repeat of the disastrously entangled affairs of Lehman, which are still being unpicked. The aim would be to have structures that are relatively simple. Commenting, Lord Turner said that in the past authorities have tolerated complex structures, which optimised regulatory and tax arbitrage. “Now we may have to demand clarity of legal structure”. He acknowledged that rules for transparency and streamlining would be highly contentious, and that one side effect would be to unravel structures which exist for the purpose of minimising taxes worldwide. However Lord Turner was not making any suggestions about tax. If such “living wills” for banks ever become a reality, which many doubt, the tax implications will be no concern of the FSA.
In a separate interview with Prospect Magazine, Lord Turner said that following the “over-simplistic” financial deregulation in the UK, we now have a swollen financial sector with excessive pay. There would be no point in the UK legislating to regulate pay in banks, as there are so many ways for a multinational bank to circumvent such a national law. He said the only way to stop excessive bank remuneration is to reduce pre-remuneration profits. That can be done by (a) higher capital requirements against trading, to reduce the level of activity; and/or (b) taxes on the bank’s transactions, to reduce revenue from the trading. Lord Turner stressed that the FSA’s concern is the effect of bank pay structures on risk. If the FSA does not like the new remuneration policies being developed it will push for higher capital requirements. Lord Turner did comment that if higher capital requirements do not work, he would be happy to see a Tobin tax on financial transactions (after Yale economist James Tobin who first suggested such a tax in the 1970s) although that was not a matter for the FSA. Lord Turner said the problem would be getting global agreement; clearly he was not envisaging a unilateral UK levy.