EU CAPITAL MARKETS UNION
In our May 2015 issue of Exchange – International we reported on the European Commission’s 18 February 2015 green paper titled Building a Capital Markets Union. The paper explains the aims of the Capital Markets Union (CMU) to improve and increase access to financing for businesses across Europe, particularly small to medium sized enterprises (SMEs), and investment projects such as infrastructure. The CMU also aims to make markets work more effectively and efficiently, in linking investors to those who need funding. We also reported that the Commission had, on the same date, published a consultation document on its review of the Prospectus Directive, which it considers to be a key feature of establishing the CMU.
On 30 September 2015, the Commission published an action plan on building the CMU (action plan). The main motivation offered by the Commission for driving forward these plans is the amount of funding available to private companies within deep and effective capital markets. The Commission compares the EU to the US in this regard and states that if venture capital markets in the EU were operating at similar levels as those in the US, over €90 billion would have been available to finance companies between 2009 and 2014. The action plan notes that there is no one single measure that will deliver the CMU. Instead there will be a range of steps whose impact will cumulatively be significant. These steps are highlighted below.
Enhancing funding choices for Europe’s businesses and SMEs
The Commission notes that barriers exist at every stage of the capital markets fundraising process of Europe’s businesses. These barriers are particularly pertinent to SMEs and smaller businesses such as start-ups. To overcome these barriers, the Commission will modernise the Prospectus Directive making it less costly for businesses to raise funds publicly and review regulatory barriers to small firms listing on equity and debt markets. Further, the Commission will launch a package of measures to support venture capital and equity financing, including amending the Regulation on European Venture Capital Funds and the Regulation on European Social Entrepreneurship Fund. Also on 30 September 2015, the Commission published a consultation paper to gather evidence on the performance of these two regulations and identify measures to increase the use of passports for venture capital funds and social entrepreneurship funds. The Commission hopes to promote innovative forms of business financing such as crowd-funding, private placement and loan-originating funds whilst safeguarding investor protecting and financial stability.
The Commission notes that Europe requires new long term and sustainable financing for infrastructure to enhance competitiveness and shift to a low-carbon economy. The Commission will therefore swiftly revise Solvency II calibrations to that insurance companies are subject to a regulatory treatment which better reflects the risk of infrastructure and European Long Term Investment Fund investments. A similar review of the Capital Requirements Regulation for bank exposures to infrastructure will also be undertaken.
The action plan also announced the launching – on the same day – of a call for evidence to evaluate the interactions between rules and the cumulative impact of regulation on investment markets. This, the Commission says, builds on the work of the European Parliament, the Financial Stability Board and the Basel Committee on Banking Supervision in revising the coherence of financial regulation since the global financial crisis.
Retail and institutional investors
The action plan sets out plans to increase investment and choices for retail and institutional investors. The Commission cites that retail investors have significant amounts saved in bank accounts but are engaging less in capital markets. In relation to institutional investors, the Commission determines that they cannot find sufficient investments that deliver the returns needed to meet their commitments.
In response to these issues, the Commission will examine ways to boost choice and competition in cross-border retail financial services against a backdrop of increased on-line provision and fintech. The scope of this would include disproportionate marketing requirements, fees, and other administrative requirements imposed by host countries and the tax environment. The Commission will then seek to eliminate key barriers, through legislative means if necessary.
The Commission will also consider establishing a European market for personal private pensions in which pension providers could opt for when offering private pensions across the EU. The commission will determine whether EU legislation is required to underpin this market. Further, the Commission will deliver an effective European fund passport that eliminates cross-border fees and barriers to increase competition and consumer choice.
In the action plan, the Commission notes the central role of banks as lenders to business, particularly to SMEs. To ensure that bank lending continues to play a central funding role, the Commission will revitalise European securitisations to free up capacity on banks’ balance sheets to enhance access to investment opportunities for long term investors. On the same day as the action plan was published, the Commission published a legislative proposal for creating a European framework for simple, transparent and standardised securitisation. Amendments to the Capital Requirements Regulation to make capital treatment of securitisations for banks and investment firms more risk-sensitive are planned for a later stage.
Also on 30 September 2015 the Commission launched a consultation on covered bonds in the EU, with a view to developing a pan-European framework for covered bonds. The Commission cites as its rationale for this the currently fragmented state of the covered bonds market along national lines, and expresses a desire to build on these national regimes without disrupting them.
The action plan also cites the use of credit unions to encourage lending, as they are already exempted from the Capital Requirements Directive regulatory framework in some member states. The Commission believes that this benefit should extend to all member states, and therefore states its intention to explore the possibility for all member states to authorise credit unions which operate outside the capital requirements framework for banks.
Bring down cross-border obstacles to investment
The Commission notes that there are still many obstacles that stand in the way of cross-border investment including inconsistent insolvency, tax and securities laws as well as fragmented market infrastructure.
The Commission will consult on key insolvency barriers and take forward a legislative initiative on business insolvency, including early restructuring and second chance. The Commission also plans to address uncertainty surrounding securities ownership, by proposing uniform rules to determine which national law shall apply to third party effects of the assignment of claims. The Commission vows to undertake a review on removing Giovannini barriers (specific barriers identified by the Giovannini Group of banking experts that prevent efficient EU cross-border clearing and settlement), following the implementation of recent legislation and market infrastructure developments. Further, the Commission also plans on addressing tax obstacles to cross-border investment by, for example, promoting best practice and developing a code of conduct with member states on withholding tax relief principles.
An area pertinent to cross-border investment identified by the Commission in its action plan is financial stability. It therefore proposes to work with the Financial Stability Board and European Supervisory Authorities alongside the European Systemic Risk Board to assess possible risks to financial stability arising from market-based finance. The Commission states that it will work with European Securities and Market Authority (ESMA) to develop and implement a strategy to strengthen supervisory convergence and to identify areas where a more integrated approach can improve the functioning of the single market for capital. Finally the Commission will, through the Structural Reform Support Service, develop a strategy for providing technical assistance to member states where needed to reinforce specific capacities of national capital markets.
The action paper outlines that the proposed actions will be subject to consultation and impact assessment. However the Commission had previously stated in a February 2015 green paper that by 2019 it intends to have completed the priority actions to have the CMU in place.