Reinforcing Resilience: Making the UK a citadel of long-term finance
Updated: Sep 4
A Vision for Long-Term Finance
Published in September 2019 by Intelligence Capital, Reinforcing Resilience presents a bold vision for the future of the UK financial sector. Authored by Keval Bharadia, former Head of Derivatives Product Development at the London Stock Exchange, and Laurey Boughey of Stamp Out Poverty, the report builds upon Professor Avinash Persaud's 2017 proposal (Improving Resilience, Increasing Revenue). The authors argue that the UK's financial sector has veered dangerously toward a "transactions-led model" where short-term trading and excessive portfolio churning dominate. By expanding the scope of financial transactions taxes (FTTs), the UK can disincentivize socially unproductive speculation and reorient the City of London into a "citadel of long-term investment".
Expanding the Tax Base
The 2017 proposal successfully demonstrated how modernizing the existing UK Stamp Duty Reserve Tax (SDRT) on equities, specifically by closing the intermediary exemption and including corporate bonds and equity/credit derivatives could raise an additional £4.7 billion annually. Reinforcing Resilience pushes this framework further, advocating for the inclusion of three massive, previously untaxed asset classes:
1. Foreign Exchange (FX)
The foreign exchange market is the largest in the world, with a daily notional turnover exceeding $5 trillion. The report proposes taxing the wholesale FX market, both spot and derivatives, which is dominated by large investment banks. Crucially, retail foreign exchange (such as public currency purchases for travel) would be entirely exempt, as would the first £1,000 of daily transactions per market participant. Because genuine trade-related FX trading represents less than one-tenth of total transactions, the tax would squarely target the high-frequency speculative churn that drives boom-and-bust cycles.
2. Interest Rate Derivatives
With a staggering daily global notional turnover of $10.5 trillion, interest rate derivatives are heavily utilized by banks for hedging and speculation. The authors emphasize that taxing wholesale trades of these derivatives would not impact retail interest rates for mortgages or personal loans, which are dictated by central bank base rates and inter-bank lending rates, not marginal derivative costs. To protect cash-like transactions, derivatives with a maturity under three months would be exempt.
3. Commodities
The report also proposes taxing both the spot and derivative markets for commodities (such as energy, metals, and agricultural products). Including both markets ensures that traders cannot simply substitute spot trading for derivatives to avoid the tax.
Revenue Potential and Collection
By calculating the economic value of these trades (rather than their inflated notional values), the authors estimate that taxing these additional assets would generate £2.13 billion annually for the UK Exchequer.
Foreign Exchange Spot: £1.79 billion
Foreign Exchange Derivatives: £0.10 billion
Interest Rate Derivatives: £0.14 billion
Commodities (Spot and Derivatives): £0.10 billion
The report outlines a robust collection methodology based on the "residence principle," meaning any UK tax resident would be liable for the tax regardless of where the trade physically occurs. Collection would be automated by integrating the tax into existing clearing and settlement networks, such as the Continuous Linked Settlement (CLS) Bank for FX and SwapClear for interest rates.
Dispelling the Myths
The authors preempt the financial lobby's predictable objections, particularly threats of capital flight in a post-Brexit landscape. They argue that the proposed tax rates (e.g., 0.02% for financial firms trading FX) are set conservatively at just 50% of existing transaction costs. This marginal increase is far too small to prompt an exodus, especially when weighed against the UK's deep market infrastructure, access to human capital, and competitive corporation tax rates.
Furthermore, the tax actively benefits long-term investors like pension funds, who trade infrequently and are currently losing billions to the high fees charged by high-turnover hedge funds.
Ultimately, Reinforcing Resilience proves that by implementing a comprehensive FTT, the UK can raise vital public funds while actively building a safer, more productive financial system for the future.
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