‘Tobin tax’ would cause radical remodelling of UK fund industry

The UK fund management industry faces complete transformation if the financial transaction tax – or Tobin tax – is implemented, commentators have warned.

Money market funds, short duration fixed income funds and government liquidity funds would be most exposed to the damaging impacts of the tax, with experts saying such strategies would be “untenable”.

The tax could also prompt a move away from active towards passive strategies which will be less affected by the new regime.

“Money market funds, which employ daily trades, will be immediately affected,” said Jorge Morley-Smith, head of tax at the Investment Management Association (IMA).

“People will quickly realise they will become unfeasible, along with funds that deal in derivatives and money market instruments.”

The Europe-wide tax on financial transactions on stock, bonds and derivatives trades is expected to be implemented from 2014, and EU members are likely to push ahead despite strong opposition from the UK.

But even if the UK is excluded, UK investors will still be exposed to additional costs, as transactions with European states will be liable. In the rules’ current form, securities would be taxed at 0.1% and derivatives at 0.01%.

Asset managers are now raising concerns about the implications for the retail fund industry.

“Retail investors will be hit twice because the tax would apply to investment in underlying assets and also subscriptions and redemptions,” said Joanna Cound,
MD of government affairs and public policy at BlackRock.

“Although it appears small, when you bear in mind the different levels of transactions in the marketplace, it is significant. It could result in multiples of the annual management fee,” she added.

Increasing numbers of asset managers are now conducting their own research into how best to prepare for the tax. “The idea is that it will be a tax levied on savings products, but there are wider implications,” said Morley-Smith.

“As the tax is levied on derivatives, things like stock lending transactions will disappear. It will significantly remodel the financial services industry.” Another effect could be to disincentivise active management, prompting a move towards passive funds.

Cound said active managers might be able to adapt their strategies to counter this, but she expects investor appetite for particular funds will inevitably change as a result of the tax. 

“Active managers with more of a high-conviction, long-term holdings approach could be in a better position to weather the impact,”
she said.