On 30 September the European Commission published its Action Plan on Building a Capital Markets Union. The aim of the Capital Markets Union initiative is to create a true single market for capital in the EU. The Action Plan follows a series of consultations launched by the Commission earlier this year into CMU, reform of the Prospectus Directive, and securitisation.
What is the Action Plan?
In the Commission’s words, the Action Plan “sets out the building blocks for putting a well-functioning and integrated Capital Markets Union, encompassing all Member States, into place by 2019“. Its overall goal for CMU is “to create opportunities for investors, connect finance to the wider economy, and foster a more resilient financial system, with deeper integration and more competition“.
The Action plan aims to achieve that by:
- providing more funding choices for Europe’s businesses and SMEs, to help get capital to companies that need it to expand and create jobs
- ensuring an appropriate regulatory environment for long term and sustainable investment and financing of Europe’s infrastructure
- increasing investment and choices for retail and institutional investors, giving households better options for meeting their retirement goals
- enhancing the capacity of banks to lend, including by introducing a new regulatory framework to encourage simple, standardised securitisation as an alternative source of funding for businesses, and by changing the capital requirements to make it easier for insurers to invest in infrastructure projects, freeing up capital from banks for new lending
- bringing down cross-border barriers and developing capital markets for all 28 Member States, harmonising the application of EU rules to develop markets with higher liquidity and lower costs and improving European competitiveness compared to the US.
What is the EU planning to do, and when?
More funding choices
The Commission will publish a proposal to modernise the Prospectus Directive in Q4 2015, updating when a prospectus is needed, what has to be in it, and the process for getting it approved, to make it cheaper and easier for SMEs to list. There will be also be a “review [of] regulatory barriers to small firms listing on equity and debt markets and support the listing activities of small firms” in 2017, a review of EU corporate bond markets looking at improving their liquidity (also not due to take place until 2017) and measures to help make equity financing a more attractive option (slated for Q4 2016).
Encouraging long term, infrastructure and sustainable investment
This area is more of an immediate priority for the Commission: it launched new legislation for a distinct infrastructure asset class, reducing the amount of capital insurers have to hold against the debt and equity of qualifying infrastructure projects at the same time as publishing the Action Plan. The Commission also announced a call for evidence on the cumulative impact and interaction of the EU financial legislation, particularly those measures introduced since the beginning of the financial crisis in 2008.
Facilitating cross-border investing
The emphasis here is on encouraging convergence in regulatory practices across the Member States to ensure that actions taken at a national level don’t stop cross-border capital flows. The Commission notes that national “gold-plating” of EU minimum rules and differing interpretations of the rules are creating unjustified national barriers to investment rather than a lack of legislation at the EU level. Most of the steps to improve cross-border investment aren’t due to start until mid-2016 and 2017, and – perhaps unsurprisingly – the actions are weighted towards reviewing an reporting on the current position across the Member States and developing new strategies in key areas, rather than legislative steps. There are plans to introduce a legislative initiative to harmonise the rules on insolvency and to publish new guidance on withholding taxes procedures to make it easier for investors to fund companies in other Member States, but it is questionable how much will be achieved without new (potentially radical) legislation.
Financing for innovation, start-ups and non-listed companies
The Commissions has announced plans on supporting venture capital and equity financing by developing new pan-European fund structures and looking at better ways to incentivise venture capitalists and angel investors, promoting new forms of corporate financing such as crowdfunding and trying to overcome information barriers to SME investment. The relevant actions in this area are timetabled throughout 2016 and 2017.
The Action Plan does little to threaten London’s status as the hub of European capital markets. It is designed to make the capital markets easier and cheaper for companies of all sizes to access and to encourage long-term investment across the EU. It represents a shift away from crisis management towards a more positive, pro-active approach towards creating new markets and enabling existing market participants to operate across the common market.
The Action Plan has (unsurprisingly) been criticised by those who would have liked it to go further and regard it as a missed opportunity for the City.
Jonathan Hill, the “UK” Commissioner who is responsible for the CMU project, has said that he “[does] not want to disrupt markets that are working well in pursuit of some theoretical perfection“, which gives an idea of the limits to the ambitions of the Action Plan. It avoids institutional reform and instead concentrates on legislative reform, refinement and collaboration with existing pan-European institutions and information systems and with Member States. Given the raft of financial reforms since the start of the financial crisis, it may be no bad thing to take a more incremental approach – as well as to take the time to rationalise the body of EU financial legislation in this area – but that will depend on the success of each of the individual measures.
The proposed timetable may be realistic but it is very long, even for the EU. There is a risk that momentum will be lost, particularly given the critical national elections in France and Germany next year and the UK “in-out” referendum to take place by 2017.
There are clearly significant benefits that can be achieved from improving the functioning of EU capital markets, and the US shows that there is the prospect of far greater capacity than exists at present. Whether or not the Action Plan will achieve those benefits will take some time to tell.