It might be easy to dismiss some moans about European changes as industry special pleading but the question has to be asked – how much more can this sector take?

Responding to constant attacks on bankers’ pay, European Union countries – with the notable dissent of the UK – have agreed that bankers will not be able to receive bonuses bigger than their base salaries from 2014, although that ceiling could be doubled if bank shareholders agree. UK finance minister George Osborne, who is gearing up for his annual budget on 20 March, is reportedly trying to get this move watered down.

Lest anyone think this sort of move is the first step back towards 1970s-style wage and price controls (that is not an encouraging thought), there have been precedents. Financial institutions of various types in the UK, for example, are already forced to defer a portion of pay to encourage long-term remuneration (and hopefully, behaviour). This sounds sensible until one realises that this measure clashes with a UK Treasury crackdown on schemes called employment benefit trusts, which seek to benefit more from lower tax on capital gains than on income. (To read more about this issue, click here.)

In Switzerland, meanwhile, voters have backed measures to curb executives' pay. The measures include giving shareholders a binding vote on executive pay, banning “golden hellos” and stopping bonuses that encourage buying or selling firms (quite how this can be clearly interpreted is uncertain). Boards of directors that fail to comply face jail terms. Anyone who imagined that Swiss banking was an easy ride can think again.

There’s more. On 14 February, the European Commission proposed a directive to implement a financial transaction tax – sometimes dubbed by supportive campaigners as a “Robin Hood tax”, that would hit eurozone states and, quite possibly in time, all EU states including the UK. Again, the impact on the UK, which has the largest financial centre in Europe, could be disproportionately severe. Non-EU financial centre practitioners, such as in Singapore, must be rubbing their hands. And other measures to add to the compliance watch-list include the US FATCA Act, Dodd-Frank; EU proposed anti-money laundering rules; tougher AML rules in Hong Kong; UK clampdowns on sales of "unsuitable products"; updated Basel bank capital rules; Solvency II insurance rules, and EU controls on hedge funds. I am sure there are rules I have missed in this fat list.

Debateable wisdom

An FTT is sometimes also referred to as a “Tobin Tax”, named after the economist James Tobin who floated the idea several decades ago of a levy on financial transactions to contain market volatility. The economic wisdom of FTTs are hotly debated – while it might curb some speculative activity, a tax might also, some argue, hit liquidity and hence reduce efficiency and price discovery.

In one of the most outspoken comments from a financial industry lobby one has seen for some time, the Association of the Luxembourg Fund Industry has just issued a fierce assault on the FTT idea. "An FTT in its present form is both unacceptable and undesirable. It would have a disastrous effect on savers, investors and the economy generally,” Marc Saluzzi, chairman of ALFI, said in a statement.  

At the heart of ALFI’s complaint is the fact that taxes imposed on an industry will inevitably be passed on: to consumers, investors and others.

Such a tax, ALFI said, risks limiting access to savings, including pension funds.

“For this reason, investment funds, which neither caused or exacerbated the crisis, should not be included within the scope of the Financial Transaction Tax,” Saluzzi said.

What is at stake

To give some idea of what is at stake, recent industry figures show that European mutual funds held a total of around €8.944 trillion ($11.66 trillion). In January last year, the Alternative Investment Management Association predicted that an FTT will hit cross-border trading and could cut more than a full one per cent off the economic bloc’s GDP.

ALFI, meanwhile, contests the idea that a levy will focus on hitting speculative froth, noting that money market funds (as of 31 December last year), made up 16 per cent of European fund assets, or €1.05 trillion, holding low-risk instruments. And more broadly, the tax will hit funds of bonds and stocks and damage the companies reliant on debt and capital.

And this final line of ALFI’s statement is an eye-catcher: “Between 2007 and 2011, the market share of European industry in the global management fell from 35 per cent to 31 per cent in terms of assets under management, and this negative trend will only be increased by this measure.”

Of course, some of that decline may simply be a mathematical function of more money being made, and managed, in regions such as Asia, so that is hardly cause for gloom but cheer. But supposing that some of this shift is also driven by regulations and tax, the risks are obvious. It makes no sense for policymakers to hurt this industry out of a misconceived view about what caused the financial smash of 2008. There is only so much tax and regulatory control that can be imposed without causing serious damage. And no wonder the compliance industry is booming.