Update on Capital Market Union (CMU2)
It was already a year ago that I dedicated my column to the CMU, the Capital Markets Union, which has been close to the European Commission’s heart for a number of years.
If you wish to refresh your memory, it is available in the “Regulatory videos” section of our website.
A quick recap for those who do not have time to refer to it: this initiative by the European Commission, launched in 2015, supports and supplements the “Investment Plan for Europe”, which is intended to boost investment in the EU; most measures are focused on redirecting financial intermediation towards the capital markets and eliminating obstacles to cross-border investment; finally, the action plan includes a series of tools, ranging from EU legal acts to supporting initiatives taken by industry.
A year ago, we responded to the new mandate, and were just beginning to think about the start of a new phase for the CMU, and, as I said at the time, both the European institutions and industry representative bodies showed some enthusiasm for this, each, as appropriate, with their own analyses, observations and proposals.
This work continued in the following weeks and months, and in particular gave rise to the publication of a comprehensive report produced by a panel of experts, appointed in October 2019 by the European Commission itself: the CMU High Level Forum or HLF. This report was submitted for consultation over a period of three weeks following its publication on 10 June 2020.
The European Commission now has not only the proposals set out in this expert report, but also the reactions to these proposals, collected as part of the consultation process, with which to create an action plan supporting the implementation of phase 2 of the CMU. This is all the more eagerly awaited given that we need to restore the European economy following the pandemic, respond to the climate emergency, and support the development of digital technology, as well as deal with the exit from the European Union of the United Kingdom, which has the biggest financial market in Europe; all this only increases the need for an integrated and efficient European capital market.
We do not know what the content of this action plan will be, ultimately. However, pending its publication, we can at least look again at the proposals put forward by the HLF, even if for the moment, these only represent the views of the HLF itself and not the Commission's position, to the extent that it was mandated by the Commission and that the Commission itself chose the experts responsible for making these recommendations to it.
The HLF report contains - and here I use the term employed by its Chairman Thomas Wieser, which remains topical - 17 clusters of measures that, in his words, “are mutually reinforcing, and dependent on each other”. It is therefore intended to be a global and coherent approach.
The observations remain the same as in 2015, updated by the latest “developments” that I mentioned previously.
Taking into account the impact of the pandemic, challenges relating to innovation and the implementation of ESG principles, the economy’s financing needs are considerable, and it is clear that the banking sector, however effective it may be, will not be enough. Stable and long-term funding sources therefore need to be strengthened.
Requirements relating to savings products, but also acceptable returns, are also significant, and the difficulties of creating cross-border investment pools are also obstacles that must be overcome if we wish to respond to forthcoming challenges for European savers, future pensioners, and investors.
In order to meet these requirements, the aim, as clearly stated by Thomas Wieser, is to put in place "....a European Capital Markets Union, a savings and investment union, that works for all".
The CMU, or rather the success of the measures intended to facilitate its establishment, is the sine qua non condition for Europe’s development, the reinforcement of its international position, and the resulting strengthening of the euro’s role, but also a pre-condition for the success of Banking Union and the assurance of greater resilience to economic shocks. All for the good of its citizens and its businesses.
And all while ensuring compliance with the sacrosanct principles of financial stability, investor protection, and healthy and fair competition between players.
- First of all, the method: The urgency of the current situation advocates the rapid implementation (in essence, the measures proposed should be adopted between end-2020 and end-2022) of a package of ambitious legislative reforms backed by precise planning, the desire among politicians not to give in to partisan interests, and a joint commitment by the European Commission and co-legislators to drive the reforms and by the member states to implement them without delay.
The effectiveness of the proposed measures must be systematically evaluated in relation to the principles established for the construction of the CMU. They must also include a simplification objective.
- Furthermore, and this is an important point, legislative measures could be supported by initiatives undertaken by industry, for example, the definition of standards or the development of shared platforms.
- Finally, pro-active communication relating to the implementation of initiatives will provide information on compliance with the initial planning and ensure momentum is maintained.
What are the proposed strategies to achieve these ambitious objectives?
The idea here is not to set out in detail the measures put forward by the HLF, but rather to highlight the main guidelines. Indeed, the purpose of this column is not to replace the 129-page report, which I would recommend you refer to if you wish to obtain more information1.
The HLF recommendations are organised around four main lines:
- The financing of business
- Market infrastructure
- Investors’ engagement
- Obstacles to cross-border investments.
There are several issues there that had been tackled in the first action plan in 2017.
It is thus again focused on long-term investment funds, ELTIFs, but this time, with the desire to see the introduction of the tax incentives that were woefully lacking in the past. It is also proposed that investment in equities by institutional investors, banks and insurance companies be encouraged by easing their prudential constraints; but also that the role pension schemes may play in supporting long-term investment be strengthened and monitored, at the same time as guaranteeing pension levels.
Facilitating the access of SMEs2 to the financial markets and relaunching securitisation are two areas that have been revisited, and it is of course also recommended that the regulatory framework applicable to digital assets be defined at the European level. In this digital area, issues relating to cybersecurity and the management of cloud services are tackled.
As regards market infrastructure, only CSDs3 are affected by measures to remove barriers, which, in their area, obstruct cross-border investment: passporting, supervision and cross-border access to central bank money are all mentioned here.
The HLF report deals with other barriers caused by the fragmentation of the rules that govern them, for which standardisation is recommended: these include the handling of withholding tax, insolvency regimes, and of course disparities in supervision.
The strengthening of investors' engagement is first of all based on a review of the shareholders’ rights directive (which recently came into effect, on 3 September 2020), in order to improve even further the harmonisation and standardisation of the voting process at general meetings and the processing of securities transactions. In addition, HLF experts are concerned about the economic and financial shortcomings of individual investors, as well as their lack of confidence and commitment: they recommend education and training initiatives, but also enhanced transparency in terms of advice and the descriptions of financial products in order to encourage productive investment and provide effective support to investors in their decisions. Still in relation to transparency, it is proposed to create a single European platform gathering public, financial and non-financial information, made available by the companies concerned (EU Single Access Point). Finally, it is suggested to facilitate the sharing of investors’ financial and non-financial information (Open Finance), as was done in the payments domain with the PSD 24 directive.
Note that the HLF did not repeat a number of recommendations that nevertheless contribute to the objectives pursued by the CMU, because they are already covered by initiatives launched by the European Commission, for example those included in the current review of MIF II MIFIR5.
So there are a number of proposals to consider. Are they appropriate? Do they go far enough? Are they sufficient? As I said, they are subject to consultation, but so far, we have not had any feedback from the European Commission on the responses it has received. And we do not yet know what its intentions could be in the long term. A priori, a communication on these two topics can be expected in September 2020, which is very soon.
From the responses to which we contributed or have access, we can see in general fairly strong support for the objectives set out in the report and the proposals made by the HLF, often accompanied by additional proposals aimed at strengthening or supplementing these. This is especially the case with regard to those relating to post-trading, since in 2017, the industry produced an extremely comprehensive and detailed report, the EPTF6 Report, and hardly any of the recommendations made at the time were taken up by the HLF.
It will be interesting to see what comes out of the June 2020 consultation and the measures that the Commission finally decides to implement. These factors could be analysed in our next column at the beginning of next year.
2 SMEs : Small and Medium Size Enterprises.
3 CSDs: Central Securities Depositories.
4 PSD: Payment Services Directive.
5 MIFIR: Markets in Financial Instruments Regulation.
6 EPTF: European Post-Trade Forum.