German citizens losers in financial tax plans, say asset managers

While the vast majority of the German population is in favour of the financial transaction tax backed by their chancellor, they may not realise the burden is likely to fall on their shoulders, say asset managers and fund allocators in the country.

The tax is backed by up to 80% of German citizens, according to some polls.

The European Commission plans introducing the new tax by January 1, 2014 at rates of 0.1% for conventional financial transactions, such as in shares and stocks, and 0.01% on derivative trades. The tax will affect all financial institutions with presence in an EU country.

A paper published recently by DWS Investments, the mutual fund arm of Deutsche Bank, argued the tax would be paid for by customers, not by the financial sector that it arguably seeks to charge for the financial crisis.

In addition, the paper written by the author Bodo Herzog, professor of economics at Reutlingen University in Germany argued the tax would not work to solve the Eurozone’s sovereign debt crisis.

It “unencumbers mainly public but not private debt”, he wrote.

German investors and fund managers also voice concerns that the tax may throw the whole financial industry out of balance.

Randolf Roth, head of market structure at international derivatives exchange Eurex, said the tax would cause markets to “stop operating as we know them.”

Christian von Strachwitz, founding partner of German alternative manager Quaesta Capital, told a recent roundtable event of publisher Opalesque: “There are lot of strategies which are not profitable anymore if you impose such a tax fee on them.

“That means the whole investment landscape will totally change, with whole strategy sectors and funds not able to survive in such an environment.”

The main concern about the tax expressed in the DWS paper – entitled The Euro Crisis and Its Implications, is that the tax will not be implemented globally.

“As long as the tax is not implemented internationally, it may just slow market processes or reduce volatility triggered by traders in the euro area,” wrote Herzog.

Roth added the tax would hit “precisely those parts of the financial industry which had nothing to do with the causes of the financial crisis”.

His sentiment found support recently from Thomas Richter, managing director of Germany’s Bundesverband Investment und Asset Management, who said simply, “the tax will hit the investors”.

Richter believes it will have the most detrimental impact on companies and private individuals invested for the long term, including pension assets.

Fund investors will carry the additional burden of paying for entry into a fund and all the transactions made by that fund on top of that, Richter added.

The tax will also affect the performance of those funds that fall within the tax regime versus peers outside the scope if the tax. Those beyond the tax’s reach could have better returns due simply to lower transaction costs, affecting the competitive landscape.

Roth believes that the costs will be detrimental, pushing market participants out of the EU.

He used DAX futures as an example, saying they would suffer tax of €15 per side and per contract under the proposed regime. “In contrast, our fees are at €0.30, while a typical broker commission would be at €1.5 and the average profit of a trading firm providing liquidity in this product is about €0.50-1.50 per contract. From this they need to pay all costs related to their business,” he said.

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