On May 28, the Financial Conduct Authority (FCA) published its paper, which it had provided to the European Commission (Commission) in response to the Commission’s green paper on building a capital markets union (CMU) within the European Union (which was published in February 2015).
The FCA comments:
Although EU capital markets have developed over recent decades we agree that fragmentation persists with a strong national bias and a smaller pool of funding available for investment in the EU than in the US. In addition, many EU domestic capital markets lack scale or competitiveness compared to the US. Completing the single market in capital and breaking down barriers to cross-border capital flows will help diversify risk, create larger economies of scale and thereby enable more efficient allocation of capital.
To achieve this the FCA identifies that action will be needed to:
- increase the supply of investor finance into capital markets;
- ensure competitive, fair and effective intermediation at a proportionate cost; and
- facilitate increased use of capital market finance by corporations and others.
The FCA has commented that it welcomes the Commission’s initiative, but it believes that the CMU could only be achieved by focusing on all three of the foregoing. The FCA paper then focuses on what the FCA sees as critical elements which would enable the development of CMU to be as effective as possible. These critical elements include:
- Greater supply of investor finance: This will require appropriate investor protections and the FCA believes there isn’t any trade-off between measures to promote market access and investor protection and instead these must come together.
- Focus on effective implementation of existing and already planned legislation: The European Union already has a large amount of legislation, which promotes a single capital market in the European Union—meaning that much of the work has already been done.
- Consistent supervision: The functioning of integrated capital markets requires consistent application and supervision of the single rulebook across EU countries (which, many commentators might argue, is not currently the case and would have to work properly for a CMU to work).
- New technology: Advances in technology should be embraced by regulatory authorities (as it is by investors), despite perceived difficulties with cybersecurity, data protection, investor protection and maintaining fair competition—each of which will need to be considered and incorporated into the CMU mechanisms.
- Global landscape: The European markets have to be part of and work with the global finance landscape. The initiative should not be focused exclusively on the European Union and the Commission should make sure that any new EU legislation (whether relating to the CMU or not) is aligned with wider global standards.
The FCA’s paper is available online here.