At a glance:
- The High Level Forum has produced an ambitious and carefully targeted set of proposals which describe a new vision for the EU’s Capital Markets Union.
- The need to respond to the economic damage as a result of COVID-19 and to the consequences of Brexit could well give the so far slow-moving CMU project fresh impetus, making it a vehicle for the post-COVID recovery and a stronger Europe.
- Notwithstanding the Forum’s ambition, many key questions remain. What legislation will the European Commission eventually propose and how many of these measures can be implemented swiftly enough to make a meaningful contribution to the EU’s economic recovery?
- Despite these significant uncertainties, there are grounds for cautious optimism. After all, necessity is the mother of invention.
Reading time: 7 minutes
“The Capital Markets Union is a major element of our post-coronavirus recovery strategy. […] The Capital Markets Union can be a game changer provided we now make meaningful progress.” (Valdis Dombrovskis, Executive Vice-President of the European Commission, June 2020)
The Capital Markets Union, or the CMU, is an ambitious and forward-looking European project, aiming to bring together individual national capital markets in the EU to function as one. Launched in 2015, in response to the last financial and Eurozone debt crises, the CMU’s aspiration was to develop a large‑scale investment market akin to that of the US, and reduce reliance on bank borrowing. Whereas its sister project, the Banking Union, has made substantial progress, the CMU thus far has been an uphill struggle. The first incarnation of the project never really took off. In 2020, despite EU lawmakers having passed most of the planned enabling legislation, the EU capital markets remain fragmented. With the largest having now left the Union, and with the EU facing the prospect of having to deal with the economic consequences of COVID-19, is now the time for the CMU project finally to come through?
On 10 June, the High‑Level Forum (HLF)[i], a group of 28 experts from a wide spectrum of financial and policy-making backgrounds set up by the European Commission, produced its long‑awaited report on “a new vision for Europe’s capital markets”. The report makes a number of recommendations for how the newly-installed Von der Leyen Commission can re-invigorate the CMU agenda during its term, and it will feed into its CMU Action Plan expected later this year. As such, the proposals could well shape the future European capital markets framework over the coming decades. The package of proposals is pragmatic, broad and ambitious, in contrast with the February interim report, suggesting that COVID-19 might be injecting a fresh impetus into this so far rather slow-moving project.
Below we set out how the HLF proposes that “CMU 2.0” becomes a vehicle for the post-COVID recovery and for an integrated European capital market.
The report proposes a targeted plan of key measures to move the CMU decisively forward. It sets out 17 clear and precise recommendations across four broad clusters – corporate access to finance, market infrastructure, and retail and cross-border investment. The recommendations are meant to be seen, and are proposed, as a package, and are mutually reinforcing. The HLF calls on the Commission to initiate the legislative process swiftly – in many cases as soon as this year – in order to create and sustain momentum. (The HLF wants the Commission to introduce at least seven measures before the end of this year and a further ten in 2021.) What the HLF proposes looks surprisingly pragmatic, both in terms of identifying the most pressing needs, oriented to bringing the maximum benefit, and also the precision of their suggestions – clearly with a view to making it feasible for EU lawmakers to address them rapidly.
CMU role in Europe’s future
One of the HLF’s key messages is that the EU needs the CMU now more than ever. The group points to the economic downturn triggered by COVID-19 and Brexit as compelling and urgent reasons for creating an integrated and fully functioning European capital market. It sees the structural changes following Brexit as potentially exacerbating the weaknesses of EU financial structures and economic competitiveness. To tackle these challenges, it argues, the EU needs “rapid and bold measures”, as no single Member State or a group thereof can manage the current crisis, Brexit, and the recovery on their own.
HLF experts stress that CMU completion is essential for building resilience against economic shocks, for the Banking Union to succeed fully and ensure true risk sharing within the European market, and will help European companies to compete and lead globally. Notably, the report emphasises the importance of two particular initiatives for the future of European capital markets – sustainability and digitalisation. The HLF notes that only sustainability can ensure prosperity in the longer run, and sees the CMU as vital to attain sustainable growth and deliver Europe’s New Green Deal. “Mastering and leading” digitalisation, as part of Europe’s Digital Agenda, is seen as critical for the EU to be globally competitive.
The HLF calls for an inter-institutional effort and a tight and ambitious timeline for the initiation of the proposals. It sees “timely, full and unwavering political backing at the highest level on a clear plan” as critical to CMU completion, stressing that joint and upfront commitment to “a bold and precise package of reforms” from all three European co-legislators – the Commission, the Council, and the Parliament – is critical.
The proposed recommendations aim to address the perceived obstacles to success for European capital markets. The measures seek to: (i) simplify the existing rules and reduce legal uncertainty from different application and enforcement of rules across the EU27; (ii) address unintended consequences of the existing legislation and high compliance costs; (iii) improve access to information and reduce its costs; (iv) review investment barriers; (v) incentivise the use of new digital technologies; and lastly (vi) enhance trust and confidence of European citizens in capital markets.
Recognising that market-based financing in the bloc remains limited – affecting companies with global growth potential, SMEs, and sustainable investments – the HLF calls for a series of targeted amendments to the EU securitisation, prospectus, market abuse and MIFID regulatory frameworks to make public listing more attractive. The group is of the view that a targeted review of Solvency 2 (to tackle underinvestment in equity) and attention to certain Basel III standards (to increase market-making capacity and deal with underinvestment in equity) could also significantly encourage higher investment.
The report further recommends reviewing the existing financial legislation to clarify its application to crypto/digital assets, and advocates new legislation to regulate assets outside the existing regulatory framework, to harness untapped opportunities of new digital products and technologies.
To make the market infrastructure stronger and more efficient, the HLF invites the Commission and national regulators to smooth the way for the use of technology, seeing this as key to wider investor engagement. It also advocates a harmonised legislative framework around cloud services / ICT infrastructure, and improving the EU’s digital competitiveness through encouraging the development of European cloud service providers, a market currently dominated by US firms.
In order to boost retail investment in capital markets, the HLF recommends developing, aligning or amending measures around financial literacy, inducement rules, and pensions. Importantly, it specifically recommends the creation of a new category of “non-professional qualified investors” under MIFID 2. This would enable more experienced retail clients to benefit from disclosure requirements better tailored to their actual needs, and limit unnecessary administrative paperwork.
It further calls for a swift review of the controversial and widely criticised PRIIPs Regulation, particularly an in-depth analysis of all its disclosure rules (to make them more digitally accessible, coherent and understandable for retail investors), and the development of independent digital comparison tools.
To facilitate cross-border investments – with a view to enable economies of scale and improve the attractiveness to foreign investors – the HLF recommends new and/or harmonised measures around withholding tax and corporate insolvency laws. It also urges the Commission to strengthen further European supervisory convergence, and enhance ESMA and EIOPA’s horizontal rule‑making powers – acknowledging the lack of consensus on the more ambitious calls for giving ESMA and EIOPA direct supervision powers over FMIs/large firms.
The HLF’s report highlights the need for the swift development of EU capital markets in order to respond to the double whammy of the recession brought on by COVID-19 and the loss of the EU’s largest capital market following Brexit. But its ambition goes beyond this which, in turn, complicates the overall picture.
Many recommendations overlap with and reinforce initiatives already in train, such as the expected MiFID 2 “Quick Fix”, or the broader ongoing MiFID 2 Review. In addition, the HLF resurrects some CMU 1.0 initiatives, for example around withholding tax and the harmonisation of corporate insolvency laws, and calls for the introduction of new ones, such as a regulatory framework for open finance.
The ball is now in the European Commission’s court – the next step is to determine how many of the HLF’s recommendations feature in its Action Plan. In some respects, the more far-reaching the legislative proposal, the more difficult it will be for it to make the rapid progress that is needed if it is to influence the post‑COVID 19 economic recovery. On the other hand, and more positively, as we have observed previously, the EU’s biggest institutional leaps forward and most pragmatic solutions for banking and capital markets have often been driven by its response to past crises. The scale of the economic and financial challenges that follow the COVID-19 pandemic may give the EU another such opportunity. Necessity is the mother of invention.
[i] The group was set up by the Commission in November 2019 as a practical response to the Council conclusions on deepening the CMU.
“COVID 19 has ravaged the global economy, and Europe is well poised to emerge over time from this crisis in a balanced manner. [O]ur recovery will not come about as hoped if we do not harness the power of all national capital markets for financing the growth of the future. […] With the collective power of integrated capital markets that work for all this can come about for all. Without, we have our doubts.”