The remarks, contained in a letter sent by New York Democratic senator Charles Schumer to US Treasury secretary Timonthy Geithner on 23 March, have sparked concern among funds industry representatives and other financial services professionals, who say the industry could be moving towards protectionism.
Others, including Jersey Finance chief executive Geoff Cook, believe that clear heads will prevail.
"I don’t believe [US President] Obama will pull away from his G20 commitment to avoid protectionism," he said. "My view is that a compromise will be reached which takes account of the significant benefit that the US brings to Europe in terms of private equity and hedge fund investment."
In his letter (reproduced below), Sen Schumer tells Geitner: "If the European Union proceeds to adopt protectionist rules that discriminate against U.S. firms and activities, I stand ready to call on Congress to pass equivalent legislation, including measures that would (i) prohibit funds that are not headquartered in the US from marketing and raising money here and (ii) require all funds operating in the U.S. to use only U.S.-headquartered custodian banks."
New US law ‘protectionist’
Sen Schumer’s letter to Geitner was written days after President Obama signed into law legislation that some European officials say could also be seen as protectionist, because, they say, it would create barriers that would make competing with US rivals in looking after American clients prohibitively costly.
This legislation, embedded within the HIRE Act, a domestic jobs stimulus bill, and known as FATCA (Foreign Account Tax Compliance Act ), is due to take effect at midnight on 31 December 2012, and would force foreign financial institutions to gather and remit information to American tax authorities on any American clients (“US beneficial owners”) they have.
There is also a provision that would require them to withhold 30% tax on the accounts of such individuals.
Jay Krause, a partner in the London office of the international law firm Withers and co-head of its funds, investments, tax and trust group, said that although the intentions behind FATCA "are largely good, [in] that US people should not be able to escape their tax liabilities by investing through non-US entities," it could "likely drive US investors and account holders to a somewhat limited number of institutions, most likely US institutions and a handful of non-US institutions that have the expertise to draw on.”
For Cook, meanwhile, whose organisation represents Jersey’s £166trn funds industry among others, Sen Schumer’s letter to Geithner highlighted "the importance of the EU maintaining access to the market by non-EU fund managers, [because] not to do so brings the very real prospect of restricted investment choice".
Sen Schumer’s letter:
Dear Secretary Geithner,
I am writing you out of deep concern about proposals circulating in the European Union that would overtly discriminate against American funds. There are multiple proposals under consideration, but they would all have the effect of significantly limiting or even prohibiting non-EU investment funds from marketing in the EU, despite the fact that EU-based funds have full access to our markets.
I fully support your letter, dated March 1st, 2010, to European Commissioner Michel Barnier, and I respectfully urge you to work with Mr. Barnier, the European Council and the European Parliament to ensure the adoption of provisions that will not discriminate against U.S. firms. Just as EU-based funds and custodian banks currently have full access to our market, U.S.-based funds and custodian banks should similarly not arbitrarily be denied access to the European market.
If the European Union proceeds to adopt protectionist rules that discriminate against U.S. firms and activities, I stand ready to call on Congress to pass equivalent legislation, including measures that would (i) prohibit funds that are not headquartered in the U.S. from marketing and raising money here and (ii) require all funds operating in the U.S. to use only U.S.-headquartered custodian banks.
The United States of America and the European Union have the two largest market economies in the world. I look forward to working with you to ensure that American firms are allowed to compete on a level playing field with their European counterparts.
Sincerely,
Charles Schumer
United States Senator
