This update summarises current regulatory developments in the European Union, the UK and internationally, focussing on the investment funds and a set manager and related sectors, during the past four weeks.
EU Regulatory Developments
A Financial Transaction Tax: The Commission's Latest Proposal
The European Commission released details either this month of their proposal to introduce a Financial Transactions Tax ("FTT"). This followed statements of support for the introduction of an EU-wide FTT from the French and German governments. The EU's proposal envisages that the tax would come into effect from 1 January 2014 onwards and it is the EU's hope that it will also serve as a platform for the introduction of a global FTT.
The Commission believes that the introduction of an FTT would be an appropriate way to ensure that the financial sector (which it currently believes is under-taxed) should make a fair contribution to the cost of the financial crisis having benefited from significant financial support from national governments since it began. In addition, the Commission is of the view that an EU-wide FTT would help avoid competitive distortions and discourage risky trading strategies.
The Commission also recommends that part of the revenue raised by an FTT should be paid directly to the EU rather than going entirely to the national governments within the territories of which the tax has been collected. The FTT is thus a major element of the Commission's proposals to reduce its reliance on national contributions for its own resources.
A FTT would apply to financial transactions carried out by financial institutions. Financial transactions would include the purchase and sale of shares, bonds, derivatives and structured financial products. However, the tax would exclude residential mortgages, bank loans, insurance contracts and "day to day" financial activities. The Commission has proposed a minimum tax rate for the trading of bonds and shares of 0.1 per cent, and 0.01 per cent for derivative products. This would be calculated by reference to the actual consideration paid (or market value when higher) or the "notional amount" in the case of a derivative contract. The tax would be paid by each EU-based financial institution which is a party to a transaction, and where there is more than one such financial institution the tax would be shared between them.
Financial institutions within the scope of the FTT would include investment firms, organised markets, banks, insurance companies, pension funds, collective investment schemes, leasing companies and special purpose vehicles (such as securitisation SPVs). As well as covering financial institutions incorporated in the EU or operating branches in the EU, the tax would include not only entities authorised in an EU member state, but also any non-EU entities which are a party (whether as principal or agent) to a financial transaction with an EU-based financial institution, for example, a US fund entering into a derivative transaction with a German company.
The FTT would be collected by banks, brokers or dealers, or alternatively by exchanges, central counterparties or central depositories. Every entity liable for the FTT would be required to submit monthly returns to its EU member state.
Comments: Although liability for the FTT would be that of the relevant financial institutions which are a party to the transaction, according to the International Monetary Fund, most of the burden of FTT is likely to ultimately fall on consumers.
The Commission estimates that depending upon market reactions the revenues of an EU FTT could be €57 billion per annum throughout the EU. However, if the FTT is only introduced on an EU-wide basis, there would inevitably be scope for securities and derivative trading to move outside the EU. There may also be opportunities to avoid the FTT by undertaking transactions which are economically equivalent to transactions which would otherwise be subject to FTT, or a higher amount of FTT, but which themselves are not within the scope of the Tax.
Although the Commission's present proposal is for an EU-wide FTT, it would also have a potential impact on non-EU financial institutions which are caught by the tax if a party to certain transactions. It would also catch dealings in non-EU shares, bonds etc if one of the parties to the transaction is EU-based. Further, non-financial institutions which are a party could also be jointly and severally liable for FTT, along with the relevant EU financial institution(s).
Most EU member states have stated that they are in favour of introducing the FTT but the UK, while not opposed to the introduction of a global FTT, is opposed to an EU only FTT (the introduction of which could require the abolition of UK stamp duty). Since the proposal requires unanimous approval of all EU member states, the UK is in a position to block the introduction of an EU-based FTT. However, there is an "enhanced co-operation procedure" under which a number of member states can be authorised to exercise EU non-exclusive competencies through the EU institutions, with the purpose of protecting the EU's interests and reinforcing its integration process. One potential risk here for the UK government is that if FTT was introduced in this manner without the UK participating it would still impact on UK financial institutions through trades with counterparties within the scope of FTT but the UK would not share in any of the revenue generated.
The European Commission still seems extremely keen to implement an FTT on one basis or another despite its potential negative impact on GDP. Further, European policymakers have put this issue firmly on the political agenda before the next meeting of the G20, scheduled for early November. Accordingly, the proposal is one that needs to be taken seriously. Clients who are potentially adversely affected by the introduction of the FFT should consider lobbying against its introduction on a national and/or EU-wide basis.
EU Contract Law: Draft Regulation
The European Commission issued a Green Paper on policy options for progress towards a European Contract Law for consumers and businesses in July 2010, with a deadline of 31 January 2011, under the responsibility of EU Commissioner Reding (DG Justice), who has previously referred to her wish to create a European civil code and to harmonise EU contract law to provide a higher level of consumer protection.
A legislative proposal issued by the Commission on 11 October 2011 for an optional European contract law is now due to be approved shortly and is expected to take the form of a Draft Regulation, focusing on the sale of goods. Its issue has been accompanied by Member State-specific factsheets which seek to identify the current problems in the area of cross-border sales and purchases and highlight the improvements for both consumers and business (especially small firms) that the proposal will bring, in particular in comparison with existing national laws. The proposed Common European Sales Law is optional, and is currently aimed at cross border transactions, but will allow Member States the option to extend it to domestic contracts. It covers both business to business and business to consumer contracts. According to the Commission, it will give consumers more choice and a high level of consumer protection. The Commission also claims that "at least €26 billion" is forgone in intra-EU trade each year due to contract law obstacles. An Impact Assessment has also been published which accompanies the proposal.
Comments: Across the Member States this proposal continues to divide opinion. In their responses to the earlier consultations several Member States (including the UK) have expressed their concern that the Commission has failed to make the case for the introduction of an EU contract law. In addition, the proposal has been issued under Article 114, which allows the decision to be taken by Qualified Majority Voting. This choice of legal base for the proposal is also causing concern amongst a number of Member States.
The EMIR Proposal
Derivatives were brought to the forefront of regulatory concerns as the financial crisis developed, from the near-collapse of Bear Stearns to the default of Lehman Brothers and the bail-out of AIG. In October 2009, the Commission published a Communication outlining the range of legislative measures that it has now published as a draft regulation, and on 15 September 2011 the Commission issued its formal Proposal for a Regulation on OTC derivatives, central counterparties and trade repositories (known as "EMIR").
On 30 September 2011 several EU-wide trade associations sent an open letter to Commissioner Barnier expressing concerns about non-discriminatory clearing access to market infrastructure providers. They believed that choice and...