On 24 September, the European Commission published a new Capital Markets Union (CMU) Action Plan (and Annex). While it contains no immediate deadlines for firms, the document sets the Commission’s capital markets agenda for the next few years. It lists 16 action points that the Commission intends to carry forward as it seeks to “finally complete the Capital Markets Union.” The action points cover a lot of ground and will have implications for EU firms across banking, capital markets, investment management, and insurance, among others.
Since the first CMU Action Plan was published in 2015, the Commission states that it has made “significant progress on putting the building blocks in place.” However, it adds that “a lot still remains to be done.” Much has changed since 2015 and this next phase of the CMU reflects the Commission’s objectives to aid the recovery from the COVID-19 pandemic, transition towards a digital and sustainable economy, and achieve “strategic autonomy” in an “increasingly complex global economic context”, particularly one in which the UK is no longer a member of the EU.
On the digital transition, the Commission has also published a digital finance strategy (see our blog) and we expect the Commission to publish a renewed sustainable finance strategy in due course. The Commission views the CMU as part of a package alongside these other measures.
The CMU Action Plan follows the June 2020 report of the High-Level Forum on the CMU, a group made up of industry, consumer and academic representatives, set up by the Commission. The CMU Action Plan largely takes forward these recommendations on a similar timescale. (See our previous blog on the High-Level Forum report.)
Below we discuss in further detail a small subset of the actions contained in the plan.
Securing the foundations
The Action Plan looks again at many of the areas that were considered by its predecessor. The success of the CMU may well depend upon how effectively the EU is able to tackle some of the more controversial areas which proved tricky to progress the first time around, such as in relation to insolvency laws, withholding tax, and supervision.
On supervision, the Commission will focus once more on the single rulebook for capital markets and then consider strengthening supervisory coordination or introducing direct supervision by the European Supervisory Authorities (ESAs). In light of Brexit, the Commission is keen to “prevent regulatory arbitrage, forum shopping, and a race to the supervisory bottom.” The Commission will also seek to address any lessons that can be learned from the Wirecard case, where questions have been raised, among others, about the effectiveness of EU supervision.
Laying down new building blocks
Under the Action Plan, the Commission will review and make changes to various retail investment distribution rules, as well as potentially introducing a few new ones. We expect that some of these changes will be taken forward as part of the forthcoming Markets in Financial Instruments Directive (MiFID) Review.
Distribution and disclosure to retail investors - By Q1 2022, the Commission will consider possible measures to:
- align investor protection standards in the Insurance Distribution Directive (IDD) with those in MiFID II;
- ask distributors to inform clients of the existence of third-party products;
- improve the transparency of inducements for clients;
- introduce specific reporting requirements for the distributors of retail products to allow for supervisory scrutiny;
- address conflicts of interest in the payment of inducements to distributors; and
- address weaknesses in the current disclosure framework, notably to seek better alignment of IDD, MiFID II and the Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs).
A number of EU countries are still getting to grips with existing MiFID II, IDD and PRIIPs rules. Further revisions and strengthening of rules are likely to prove challenging to implement. In particular, inducement rule changes may well have implications for firms’ business models and strategy. Firms will also be keen to learn what fate awaits the widely criticised PRIIPs Regulation and whether the Commission will live up to its ambition to support the digital transition, for example with a move away from paper-based disclosures being the default option.
The UK has already gone further than most other EU countries in the area of inducements and investor protection, for example, through the Retail Distribution Review (RDR), and HM Treasury has already published a policy statement, setting out how it will amend the PRIIPs Regulation as part of the UK’s onshoring of EU regulation. A key question will be whether the EU’s proposed revisions with respect to distribution and disclosure will narrow the gap between the EU and UK, or whether they will take them on divergent paths. (See our blog for further discussion on areas of regulatory divergence between the EU and UK.)
Potential new category of qualified investors - The Commission will amend MiFID II by Q4 2021 / Q1 2022, with the intention of reducing the administrative burden and information requirements for a subset of retail investors. This will involve reviewing the existing retail and professional investor categories or introducing a new category of qualified investors. Any potential amendment in this area could open up new opportunities for firms to develop solutions tailored to this subset of clients. However, it could also mean that firms need to update their systems to recognise any new investor category and monitor this on an ongoing basis to ensure clients remain categorised appropriately.
Advisor qualifications – By Q1 2023, the Commission intends to require advisors to obtain a certificate in relation to their knowledge, qualifications, and continuous education, as well as, by Q1 2022, assess the feasibility of setting up a pan-EU label for financial advisors. Depending on how far these changes go, they may well improve advice quality, but they are also likely to push up costs for firms, as was seen when the UK implemented its professionalism requirements as part of the RDR .
Sustainable finance and investment - The Commission views the CMU as a vital initiative that can help mobilise and channel finance to tackle the climate and biodiversity emergencies, as well as broader environmental and social challenges. The promotion of sustainable investing runs through a number of the actions contained in the Plan:
- In line with the EU’s ambition to make more strategic use of data as part of the digital finance strategy, the CMU proposes to set up an EU-wide platform (a European single access point) that provides investors with access to financial and sustainability-related company information.
- The Commission will review the European Long-Term Investment Fund (ELTIF) Regulation, which has had limited take-up. As part of this, it will look to promote sustainable investment.
- As part of its work on retail investor distribution, the Commission will look at the disclosure of sustainability-related information to retail investors.
- The Commission notes how Europeans want to have a say in how companies are being run, notably as regards sustainability issues. It is therefore bringing forward measures to boost shareholder engagement.
How well the above initiatives promote capital allocation to genuinely sustainable outcomes will ultimately depend on many factors, data quality being the most contentious, given this is derived predominately from disclosures. Any platform consolidating sustainability performance of firms, must aggregate data that is consistent and comparable – and in the end verifiable. To get there, firms will need to use standardised metrics supported by robust data governance processes. Using the existing EU Non-Financial Reporting Directive might provide a strong starting point for this.
Considering the current fragmented and underdeveloped nature of EU capital markets , Commission President Ursula Von Der Leyen’s ambition to “finally complete the Capital Markets Union” is a tall order. In the Action Plan, the Commission accepts that building the CMU will take time and that many barriers remain, driven by “history, customs and culture”.
The EU has already made some progress in laying the foundations of the CMU. Moving forward it will need to tackle successfully some of the more controversial areas, such as in relation to insolvency laws, withholding tax, and supervision. The set of circumstances which now face the EU, for example in relation to COVID-19 and the UK’s departure from the EU, may provide the strongest impetus yet for the EU to do so.
If the Commission is able to secure the foundations, it will then be able to build. The question is: will the final shape of the CMU deliver on the architects' plans?
“Let’s finally complete the Capital Markets Union,” Commission President Ursula Von Der Leyen in her opening statement to the European Parliament