Automation tipping point for financial transaction taxes arrives

By Denis Orrock | 14 September 2020

Financial transaction taxes (FTT), a levy on financial transactions such as the purchase or sale of financial instruments, have been on the radar of capital markets firms for over a decade.

The 2008 global financial crisis created political pressure to ensure that the financial sector contributed fairly to the costs of the crisis. As a result, France in 2012 successfully introduced an FTT on equity and high frequency trades, followed in 2013 by Italy implementing a similar levy on equity, derivative and high frequency trades.

Even with FTT limited to just the French and Italian jurisdictions, banks and brokers have faced highly complex processes to comply with stringent regulations. Most have built with spreadsheet-based processes or in-house platforms built specifically for the current requirements. But with more countries now exploring FTT options, complexity and volume are only going to increase.

Where next for FTT?
Following in the footsteps of its European counterparts, the Spanish Government is currently pushing an FTT bill through the parliamentary process.

Plans for a common FTT across the EU, first floated in 2011, had stalled until recently. Now it is back on the agenda as Germany, who holds the presidency of the Council of the EU for rest of 2020, has indicated a commitment to “the introduction of a financial transaction tax at European level”.

The approaching presidential election has also created debate around FTTs in the US. Democratic presidential candidate Joe Biden has discussed a potential FTT but not yet confirmed it as part of his tax reform plans should he be elected in November.

Undoubtedly the pandemic is driving this momentum as countries grapple with the very real need for additional revenue. If any or all these jurisdictions were to implement FTT, particularly with a short lead time, the compliance burden on capital markets firms would increase significantly.

Current solutions will not keep pace
In response to existing FTT regimes, many firms have created spreadsheet-based solutions – yet often these processes are highly labour intensive, can be susceptible to errors and may not stand up to the rigours of an FTT audit. Others have developed in-house platforms but they are likely to be very bespoke and therefore expensive to adapt.

In each case, these solutions will be difficult to scale up to cope with the volume growth and new regulatory requirements of additional regimes.

New jurisdictions are likely to apply different rates and to have distinct reporting requirements. There may be additional complexities and rules around rebating and netting, amendments to tax reporting.

With the varying system interfaces and trading formats, global mandates and the differing roles of the broker, asset manager, and custodian, manual solutions are highly unlikely to cope with the implementation of FTT in additional countries.

Automation is key to scalability
The FTT landscape is still evolving. Regardless of when and how new countries implement taxes on financial instruments, we know that meeting the regulations of any tax authority will always be a rules-based problem. This requires a rules-based solution that is configurable and adaptable to inevitable change.

Some firms may consider building an in-house solution themselves but given the complexities, a third party solution is likely to be more efficient and cost-effective.

Let’s take a look at the systems and technical considerations required to best to meet the FTT processing and control and data integrity needs of differing and changing tax regimes:
  • IT set-up – a cloud solution with a web-based interface will ensure quick set-up, intuitive user experience and the all-important scalability
  • Integrated data feeds – complete integration with other internal systems for seamless flows of trade, client and reference data to fulfill FTT obligations and easily accessible data for reporting, reconciliation and extraction
  • Configurable rules – the different rules of each tax regime must be managed in the system, including start and end dates, with the ability to make controlled and audited changes
Beyond the tipping point
With pressure for countries to find more revenue sources increasing in the wake of the pandemic, the challenge capital markets firms face from FTT can only grow.

GBST believes the tipping point for FTT automation is here. Firms must embrace automation now and reap the operational and competitive benefits, or risk wasting resources on trying to scale up with manual or low-tech solutions.

We also expect to see the emergence of outsourced services to manage the problem for financial institutions, creating fully automated processes to enable firms to redeploy expensive and specialist employees into more valuable revenue generating projects.

Set your firm up to turn FTT into a competitive advantage by embracing automation today.

Visit the GBST profile to download our “Financial Transaction Taxes: The automation tipping point” whitepaper for more information.

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