Why the banks' threats of moving abroad are empty

These threats allow banks to run rings around the government -- but are of questionable credibility.

Talk to a banker about financial sector taxes and they'll have to call you back from their Blackberry en-route to the airport, the rest of the company in tow, quite prepared to never set foot in the country again to avoid your unnecessary meddling. The world is their oyster -- Frankfurt, Hong Kong, New York they'll tell you -- so stop the talk of Robin Hood Taxes, or capital reserve requirements, or you'll soon be seeing tumble weed clogging up the escalators at Canary Wharf.

From a lobbyist's perspective, you can see why we increasingly hear banks threaten to move their business overseas -- it has given them the excuse they need to run rings around the government. Cue the crescendo around Sir John Vicker's interim report into banking regulation a couple of weeks ago. Cue the government's frustration, when the terms it set as part of the Project Merlin deal for banks to lend more to businesses didn't work. And whilst Ed Balls' should be commended for calling for a banker bonus tax to help tackle youth unemployment, I suspect it is also one of the reasons he limited it to a rather modest £2billion.

But putting the bank lobbyist's view aside, this story just doesn't add up from from virtually any perspective. Firstly, you have to ask what exactly "relocating overseas" means. Leading the charge, Standard Chartered and HSBC have both said they may move abroad. Their threats create an image of packing up entire trading floors, wealth management divisions and investment arms, but in both cases they are only talking about their corporate HQs and a small number of head office staff.

As a Financial Times editorial recently said:

Such threats should be faced down, not just because they are unreasonable but because they are of questionable credibility.... Were a bank such as Barclays to shift its headquarters, the impact on the UK would surely be minimal as it would still do much of its business and pay taxes in the country.

Andrea Leadsom MP, a former senior executive at Barclays and Conservative member of the Treasury Select Committee, agrees:

One or two of them might change their corporate headquarters for tax purposes but if they do go we probably won't even notice. There won't be a great outflow of workers and Canary Wharf won't turn into a ghost town.

Distractions about corporate relocation aside, banks still argue that increasing taxes will make the City less competitive and would lead to a drip-drip loss of business. And they would have us believe the government's new bank levy is evidence of a worrying step in that direction. But let's be crystal clear: we are in no danger of overburdening the banks.

The costs of the new bank levy will be largely off-set by a decrease in corporation tax, which is on course to be the lowest rate in the G7 by 2014 at 23 per cent. Our rules on writing off future tax payment against previous losses are a major boon, as Barclays so clearly demonstrated by paying a shocking £113m of tax on £11.6b of profit. Other countries are not so generous, or perhaps foolhardy, as a special Reuters report explains: "Swiss tax losses can generally be carried forward for seven years, U.S. federal tax losses for 20 years, but in the UK or Jersey, there is no time limit."

But here is the mother of them all -- a multi-billion pound reason why banks would be mad to move away: credit rating agencies such as Standard & Poors know the UK government (read: taxpayer) will not let banks fail because they would bring the rest of the economy down with them. This means lending to banks is a one-way bet and so their credit rating improves, which in turn allows them to borrow money more cheaply. Sound trivial? Andrew Haldane, executive director of financial stability at the Bank of England, said last year: "The average annual subsidy for the top five banks over these years [2007-2009] was over £50 billion -- roughly equal to UK banks' annual profits prior to the crisis." At the height of the crisis, the subsidy was worth £100bn.

Most countries are simply not capable of offering this kind of support. Those who are capable may not be willing to risk having to fund a bail-out. If banks do choose to move from the City of London's safety net, they are likely to have to accept lower credit ratings making borrowing more expensive.

Besides the favourable tax environment and epically-proportioned credit card we offer to banks based in the UK, there are many other factors that give London the edge: stable financial infrastructure, lack of corruption, ease in raising capital, lawyers and crucially, our location. Banks could not afford to shift to New York and miss out on European clients, and business so conveniently located in a time zone half way between Manhattan and the other major markets in Asia. Nor could they afford to ignore our pool of highly skilled workers, who in turn are attracted by the culture, language, world class education and variety of things to spend their money on.

According to a recent Global Financial Sector Index, London didn't come near the top for its financial sector competitiveness, it was number one. So next time the City of London complain they are hard done by, show them this report -- which incidentally, they commissioned.

In fact, you could argue that it is the banks that are overburdening us. HSBC's balance sheet is already bigger than the entire GDP in the UK, Barclays' is roughly equal. The Bank of England governor, Mervyn King, and others have questioned whether we really want to be carrying that weight on our shoulders -- a weight that could crush us next time things go wrong.

Neither the government or opposition should be held hostage to old arguments that banks are the powerhouse of our economy. Two years ago they lost this honour when their engine failed and we were forced to pump in more than a trillion pounds of public money to get it started again and we are still paying to keep it running today.

Nor should politicians shy away from ensuring banks pay to repair the damage they have caused, for example through a Robin Hood Tax, because of hollow threats that the financial sector will move their business overseas. By paying their fair share in taxes, banks can once again work in the interests of society. At the moment it's the other way round.

Simon Chouffot is a spokesperson for the Robin Hood Tax Campaign

 

Simon Chouffot is a spokesperson for the Robin Hood Tax campaign and writes on the role of the financial sector in our society.

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Is TTIP a threat or an opportunity?

TTIP offers potentially huge opportunities to both Europe and the US - we should keep an open mind on what the final agreement will mean.

Barack Obama made it abundantly clear during his visit to the UK that if Britain left the European Union then it would be quite some time before we would be able to negotiate a trade deal with the United States. All the more reason to examine carefully what the Transatlantic Trade and Investment Partnership (TTIP) will mean for the UK. For Labour this is especially important because a number of trade unionists and Party members have expressed concerns about what TTIP could mean.

The economic worth of such a partnership between the European Union and the US has been questioned and it has been frequently stated that TTIP could give multinational companies unprecedented influence and undermine the British NHS.

With regard to the economic benefits of TTIP there are few that would argue that there are no economic gains to be achieved through the partnership. The question is to what extent economic growth will be stimulated. On the positive side the European Commission has argued that an agreement could bring economic gains of between €68 billion to €119 billion per year to the EU (0.3% to 0.5% of GDP) and €50 billion to €95 billion (0.2% to 0.4% of GDP) to the US. For Britain, this means that an agreement could add up to £10 billion annually to the UK economy.

On the negative side, a study commissioned by the European United Left/Nordic Green Left Group in the European Parliament has maintained that TTIP would bring only “limited economic gains”. These gains have to be weighed, it was argued, against the “downside risks”. Those risks have been identified as coming from the alignment of standards in areas such as consumer safety, environmental protection and public health.

These are important concerns and they should not be quickly dismissed. They are made all the more important because the existence of already low tariffs between the EU and the US make the negotiations to reduce non-tariff barriers to trade all the more significant.

There are a number of areas of concern. These include food standards and the regulation of GM crops and the worry that the EU’s focus on applying the environmental precautionary principle might be weakened. The European Commission, which has a responsibility for negotiating TTIP on behalf of the EU, is however acutely aware of these concerns and is mindful of its legal responsibility to uphold, and not to in any way weaken, the agreed legal standards to which the EU adheres. A concern has been expressed that irrespective of what European law may say, TTIP could undermine those standards. This I find difficult to accept because the ‘rule of law’ is absolutely central to the negotiations and the adoption of the final agreement.

But the EU is mindful of this concern and has brought forward measures which have sought to address these fears. The latest proposals from the Commission clearly set out that it is the right of individual governments to take measures to achieve public policy objectives on the level that they deem appropriate. As the Commission’s proposal states, the Agreement shall not affect the right of the parties to regulate within their own territories in order to achieve policy objectives including “the protection of public health, safety, environmental or public morals, social or consumer protection or promotion and protection of cultural diversity”.

Of course, this is not to suggest that there should not be vigilance, but equally I believe it would be wrong to assume the theoretical problems would inevitably become reality.

The main area of concern which has been expressed in Britain about TTIP relates to the NHS and the role of the private sector. Under the Investor-State Dispute Settlement (ISDS) provisions investors would be able to bring proceedings against a foreign government that is party to the treaty. This would be done in tribunals outside the domestic legal system. If a Government is found to be in breach of its treaty obligations the investor who has been harmed could receive monetary compensation or other forms of redress.

The concern is that the ISDS arrangements will undermine the ability of democratically elected governments to act on behalf of their citizens. Some have maintained that measures to open up the NHS to competition could be made irreversible if US companies had to be compensated when there is a change of policy from a future Labour Government.

In response to these concerns the European Commission has proposed an Investor Court System. This would be based on judgements being made by publicly appointed and experienced judges and that cases would only be brought forward if they were precisely defined. Specifically, it is proposed that cases would be limited to targeted discrimination on the basis of gender, race or religion, or nationality, expropriation without compensation or the denial of justice.

Why, you might ask, is there a need at all for a trans-national Investor Court System? The reason in part lies in the parlous state of the judicial systems in some of the relatively recent EU accession countries in Eastern Europe. To be frank, it is sadly the case that there are significant shortcomings in the judiciary of some countries and the rule of law is, in these cases, more apparent than real. It is therefore not unreasonable for investors to have an international framework and structure which will give them confidence to invest. It should also be noted that there is nothing proposed in TTIP which contradicts anything which is already in UK law.

We need to remember too that this is not only about US investment in Europe, it is also about European investment in the US. No US-wide law prohibits discrimination against foreign investors, and international law, such as free trade and investment agreements like TTIP, cannot be invoked in US courts. The Investor Court System would therefore benefit European companies, especially Small and Medium Sized Enterprises. 

It is of course impossible to come to a definitive conclusion about these provisions because the negotiations are ongoing. But it would surely be unwise to assume that the final agreement would inevitably be problematic.

This is especially true regarding the NHS. Last year Unite the Union commissioned Michael Bowsher QC to provide an opinion. His opinion was that “TTIP does pose a threat to a future government wishing to take back control of health services”. The opinion does not express a view on whether TTIP will “force” the privatisation of the health service (as some have claimed) and Bowsher admits that much of the debate is “conducted at a rather speculative level” and he has been unable to produce any tangible evidence to support his contention about future problems. On the other hand, it is the case that there is nothing in the proposed agreement which would alter existing arrangements for compensation. There are of course many legal opinions which underpin the view that existing legal arrangements would continue. While I accept that it is theoretically possible for the Bowsher scenario to occur, it is nevertheless extremely improbable. That is not to say that there ought not to be watertight safeguards in the agreement, but let us not elevate the extremely improbable to the highly likely.

A frequently heard criticism of TTIP is that the negotiations between the US and the EU are being conducted in ‘secret’.  Greenpeace, for example, has strongly sought to make this a central part of their campaign.  Although the Commission publishes EU position papers and negotiating proposals soon after they are tabled, it is impossible to see how complex negotiations of this kind can be practically conducted in public.  However, I believe that the draft agreement should be made public well before the final decisions are taken.

Once the negotiations have been concluded, the draft agreement will be presented to the European Council and the European Parliament, both of which have to agree the text. The European Council is, of course, made up of representatives of the governments of the EU and the European Parliament is democratically elected. Both Houses of the British Parliament will also debate the draft and there will need to be parliamentary approval of the agreement.

Transparency and democratic scrutiny are two things which there cannot be too much of. But, in practical terms, it is difficult to see how there could be more of either without making it nigh on impossible to secure such a complex agreement. Unite, of which I am a member, and others are quite right to express their concerns about TTIP, but let’s not exaggerate the potential difficulties and let’s not assume that the worst case scenario will always come about. TTIP offers potentially huge opportunities to both Europe and the US, and we should therefore at least keep an open mind on what the final agreement will mean.

Wayne David is the Labour MP for Caerphilly and is Shadow Minister for Political Reform and Justice. He is a former Shadow Europe Minister and was a junior minister in the last Labour government.