Aug. 27 (Bloomberg) -- The chairman of Britain’s financial regulator proposed a global tax on banks that would be used to distribute profits to the world’s poor.

Financial Services Authority Chairman Adair Turner told Prospect Magazine that a so-called Tobin Tax should be considered to deflate the “swollen financial sector.”

“If increased capital requirements are insufficient, I am happy to consider taxes on financial transactions,” Turner told Prospect. “Such taxes have long been the dream of development economists and those who care about climate change -- a nice sensible revenue source for funding global public goods.”

Turner’s comments, the first time he has suggested a global tax on banking deals, follow his March report on reforms in the wake of the financial crisis and a July government paper detailing how his plans would be implemented. Turner’s report included higher capital requirements and he has also suggested a “tax on size” for banks considered too big too fail.

“If he set out to cause maximum political commotion, he couldn’t have done better,” said Simon Gleeson, a regulatory lawyer at London-based Clifford Chance LLP. “But even when he’s being stupid he’s intelligent: stamp duties on transactions hit banks’ gross revenues, including the bonus pool, whereas other forms of taxation hit profits.”

The FSA two weeks ago published a code on bonuses, designed to curb recklessness that lawmakers say contributed to the financial crisis. Twenty-six banks must follow the code, or put aside more capital to weigh against extra risk.

Financial Center

Turner also questioned whether the FSA should seek to maintain the competitiveness of London as a financial center.

“It’s clear to me that the FSA has to be very, very wary of seeing the competitiveness of London as a major aim, and that’s not a popular thing to say because it has been defined as an aim,” Turner said.

The British Bankers Association said Turner’s proposals and other reforms may threaten the financial industry in London.

“If we introduce the wrong kind of regulation or the wrong kind of taxes we could so easily lose that position by driving business abroad,” the BBA said in a statement. “The U.K. would receive less revenue through taxes and there would be job losses, not just in the banking industry, but also in” businesses “that provide services to banks.”

James Tobin, who died in 2002, won the 1981 Nobel Prize for economics for his work on financial markets. He proposed a tax in 1971 on currency trading to deter speculation in the wake of the collapse of the Bretton Woods system of pegging currencies.

Finance Ministers

The U.K. Treasury, not the FSA, oversees U.K. tax policy. Finance ministers from the Group of 20 Nations will meet in London the weekend of Sept. 5 ahead of global leaders in Pittsburgh at the end of the month.

“Taxation is a matter for the Chancellor,” the Treasury said today in a statement. “G-20 Finance Ministers will be discussing bonuses, which put the banking system at risk, in London next week.”

The FSA down played Turner’s comments, saying they weren’t official agency policy.

“Turner was at a round-table event and he was responding to questions rather than this being the formulation of FSA policy,” said Heidi Ashley, an FSA spokeswoman.

In addition to FSA chairman, Turner is chairman of the Committee on Climate Change. In a previous position as director- general of the Confederation of British Industry, he earned the nickname “Red Adair.”

Financial Stability Board

Turner is also head of the committee that encourages cooperation between regulators at the Financial Stability Board.

In the Prospect interview, which also featured former Bank of England Deputy Governor John Gieve, Turner repeated comments about the social usefulness of financial products and practices.

“There clearly are bits of the financial system, and particularly the bits that relate to fixed income securities, trading, derivatives, hedging, but possibly also aspects of the asset management industry and equity trading, which have grown beyond a socially reasonable size,” Turner told Prospect.

This was an “extraordinary stance for the chairman of the FSA to take,” Clifford Chance’s Gleeson said.

Product Marketing

The FSA would take a far more robust stance on telling banks whether they could develop untested financial products, Turner told Prospect. Until this year, the FSA kept largely out of product regulation and focused on how products were used and marketed.

The FSA said two weeks ago that concerns about competitiveness prompted changes to its bonus code from the original draft form, which attracted criticism from opposition lawmakers. The opposition Conservatives have pledged to abolish the FSA should win the next election, which must be held by May.

The changes included diluting three earlier provisions covering bonus structures into one element of “guidance.” What were mandatory provisions on deferring two-thirds of bonuses and tying incentives to the performance of an overall group rather than just a trader’s team are now simply recommended practices.

The FSA paper accompanying its final code said that the changes followed “widespread concern” that the draft recommendations “could have adverse competitive implications for the U.K. as a financial center if regulators in other countries did not implement similar (or even identical) principles.”

On whether Turner’s remarks on competitiveness were in opposition to the general FSA approach, Ashley at the FSA said that Turner’s comments “spoke for themselves.”

To contact the reporters on this story: Caroline Binham in London at cbinham@bloomberg.net

Last Updated: August 27, 2009 07:27 EDT