The Future of the European Commission’s Capital Markets Union Action Plan
The CMU Action Plan is beyond any doubt one of the most important recent developments in EU financial markets regulation.
As most of you probably know, the CMU Action Plan was launched by the European Commission in September 2015. It is a project that was intended for all 28 Member States of the European Union. Shortly before, the European Banking Union was set up at lightning speed in response to the euro crisis.
It is very important to note that the European Banking Union only applies to the jurisdictions that have adopted the euro, now nineteen in total, and not in all 28 member states of the European Union.
The far-reaching integration and cooperation that the European Banking Union entails has been and is being viewed with suspicion by some of the non-euro Member States within the Union, although non-euro Member States may also join if they wish.
That suspicion certainly applied to the UK, because at least until very recently they had a flourishing financial sector.
It was therefore time for a project that would give all 28 member states – and in particular the City of London – warm feelings: the CMU Action Plan.
The idea is simple.
The CMU Action Plan must make it easier for providers and receivers of funds to come into contact with one another within Europe, especially across borders.
This is regardless of whether raising capital occurs through the intermediation of banks, through the capital markets or through alternative channels such as crowdfunding.
In addition, more non-bank funding will help to lessen dependence on the traditional banking industry and enhance the ability of the system to cope with economic shocks.
Many challenges
Excellent idea of course, but there are some serious challenges.
First of all, there is Brexit. In the referendum of 23 June 2016, the United Kingdom signalled its intention to leave the European Union. In the light of this development, the obvious question was – and still is – whether the CMU Action Plan is still realistic if London, Europe’s financial heart, no longer participates.
The Commission clearly considers that it is. This was already apparent from its communication of 14 September 2016 entitled ‘Capital Markets Union – Accelerating Reform’. After the Brexit referendum, the CMU agenda has been adjusted somewhat, with more emphasis on supervisory convergence (no integrated financial markets without supervisory convergence or even a central supervisor) and the addition of the sustainable finance action plan.
Sustainable finance is of course very important, but today I would like to focus on supervisory convergence and the progress that we have made so far.
In short: the result is rather disappointing. In 2017, the European Commission tabled ambitious proposals to grant ESMA more direct supervisory powers, including (but not limited to):
– the approval of certain prospectuses;
– direct supervision of certain investment funds and;
– direct supervision of crowdfunding services providers.
However, these plans (which, in my opinion, were not even radical enough) did not reach the finish line. Why not? More supervisory powers for ESMA is at the expense of the influence of national supervisors and therefore of Member States.
For example, the financial supervisors in Luxemburg and Ireland are probably not too keen to transfer their supervisory powers over investment funds located in their jurisdiction to ESMA.
But apart from the lack of supervisory convergence and centralization there are, unfortunately, many more challenges.
First of all, fully integrated European capital markets may seem economically attractive, but they are far from easy to achieve.
It is a long-term project anyway. The famous Segré report from the sixties of the last century already argued for it. So the European Union has been working on it for more than half a century.
But apart from that, the European Commission wants to achieve the CMU primarily by removing obstructive rules and introducing facilitating rules, and perhaps a European subsidy here and there.
Even if we believe in the creation of the CMU through European rules, then these must be the ‘right’ rules.
And precisely, for the financial sector, this is not an easy task, partly because the financial markets are so dynamic and therefore constantly changing.
Moreover: Europe is not a federation but a colourful collection of sovereign states, which means that all kinds of national and therefore potentially restrictive rules remain.
Tax law, contract law, property law, bankruptcy law and company law – they are all essentially still national in nature.
And even assuming that we would be able to implement regulations in Europe to optimally support CMU, we simply do not have a common language and culture in Europe, like in the US.
In view of this, it remains difficult for many receivers and providers of funds to operate across borders in Europe, and this certainly applies to consumers and other non-professional investors, such as Small and Medium-Sized Enterprises or SMEs.
The CMU is also to a large extent a bottom-up project.
That is to say, the creation of an integrated European capital market is primarily up to the providers and receivers of funds themselves.
An example. An important objective of the CMU project is to improve the access of SMEs to funding. SMEs in Europe are currently mainly dependent on bank loans.
If things are going badly with the banking sector, SMEs will immediately be the victims. We were able towitness that during the financial crisis. Banks were hardly prepared to provide credit to SMEs, with all the consequences that this entails. From this point of view, it is therefore a good idea to give SMEs better access to other sources of funding and to make them less dependent on bank loans. It would therefore be nice if SMEs could have easier access to the capital markets. Then they can also attract funding by issuing bonds and shares.
Under MiFID II and the Prospectus Regulation, there is the possibility of a listing on the so-called SME growth market in the Union. Less complicated and less expensive than a real stock exchange listing.
However, the question is whether SMEs will really make use of this option, because tapping the capital markets remains an unattractive and unnatural route for SMEs, given the complexity involved.
The question is also whether there are providers of funding who are prepared to embark upon such an investment.
And furthermore: the Commission wishes to realize a fully integrated capital market, but of course while maintaining investor protection, adequate protection against systemic risks and now also with respect for the environment.
However, these preconditions are under pressure due to President Trump’s deregulation plans, his rejection of the UN climate treaty in Paris and the economic rise of China.
What image emerges from these developments ?
For me, the following. The European Union is being put to the test by a combination of internal threats (Brexit, the rise of nationalism), and external threats (Trump, Putin, the rise of China). They will have a decisive impact on the content and effectiveness of EU financial regulation in the coming years.
Is there still hope? Always. The European Union is like a cat with nine lives. But whatever one may think of the effectiveness and feasibility of the CMU Action plan, it will in any event take many years to develop truly integrated European capital markets.
