Article
Re-engineering the Capital Markets Union

As the EU-28 evolves into the EU-27, the European Commission (EC) has ensured their members that this will only be a bump in the road towards financial integration. The flagship initiative of the European Commission, the “Capital Markets Union Action Plan”, recently underwent a mid-term review of progress so far, highlighting both the achievements and additions to the objectives, which are set to take effect by 2019.

As noted in our previous article, the CMU initiative was created in early 2015 due to the lack of diversified sources of capital within the financial sector, leading to a heavy reliance on the banking sector.  Differentiating capital sources is the Commission’s answer to this issue, which will, in theory, reduce European business’ dependence on banks, subsequently leading to greater financial stability.

This plan to strengthen capital markets and investment is a top priority to for the EU.  Rightly so, as the EC aims to achieve this in order to provide small growing companies and social enterprises (SMEs) with more alternatives for funding at lower costs and to overall unite the EU members under a single common market.  Although this plan was drawn up before Brexit, the Capital Markets Union has made significant headway in its initial 30 objectives.  But, with the prospect of the EU losing its largest financial centre, strategies within the EC may be altered to adjust to their new situation.

Progress of the CMU

On 8 June 2017, the EC released its mid-term review of what it describes as “Capital Markets Union 2.0”.  The review came as an opportunity for the Commission to showcase their achievements as well as clarify how they will tackle the various changes that have taken place in the past two years.

A significant amount of progress has been made in implementing the CMU Action Plan.  When the Action Plan was first announced in September of 2015, the Commission set out to complete 33 tasks, of which 20 have been completed.  Most notably:

• Venture Capital: solid progress has been made to ensure that it will be easier for investors to invest in small and medium sized companies, thanks to the European Parliament and Council agreeing on expanding the range of companies that can be invested in
• Companies entering and raising capital in public markets: capital, in the form of debt or equity instruments within public markets, is an important funding source for mid-sized companies. The CMU mid-term review notes that significant headway has been made to facilitate access to public markets, such as the modernisation of the EU Prospectus Regulation, set to apply from mid-2019.  Furthermore, as part of the improvements, the European Securities and Markets Authority (ESMA) will operate a new EU-wide online prospectus database which will be free of charge
• Bank capacity to lend the economy: progress has been made to generate additional funding within the EU market by freeing up capacity on banks’ balance sheets.

What’s next?

While substantial headway has been made, the EC will now move forward with “nine new priority initiatives to strengthen the CMU action plan”, especially:

• Simplifying cross-border investments: As part of a comprehensive approach to enable FinTech (firms that use new technology to compete in the marketplace), the EC plans to assess the case for an EU licensing and passporting framework for Fintech activities. FinTech firms would potentially be able to conduct cross-border business without requiring further authorisation in each EU country.  This is stated to take place within the fourth quarter of 2017
• Strengthening the effectiveness of supervision to accelerate market integration: The EC states within the mid-term review that it will strengthen ESMA’s powers and grant them direct supervision authority. The review explains that this step is taken to “ensure that the single rulebook is implemented in a uniform way across the Single Market”.  The EC is set to propose amendments to the functioning of ESMA by the third financial quarter in 2017
• Increase support for SMEs on public markets: The Commission remarks that public listings of small and medium sized enterprises (SMEs) remain low in the EU public markets, stating that the “the current regulatory environment may discourage these firms from raising capital on public markets”. Therefore, the Commission will explore, through an impact assessment, whether amendments to EU legislation can deliver a more proportionate regulatory environment to support SME listing on public markets.  The impact assessment can result in targeted changes by the second quarter of 2018.

Challenges to financial integration

Since the implementation of the CMU Action Plan has commenced, the Commission has encountered a great deal of challenges. The Commission notes that “supervision and enforcement are uneven across the EU”, furthermore, the culture of long-term investments does not exist throughout all EU 27 Member States, making it difficult to enforce certain rules.  The EC responds to these issues, vowing to make the supervisory framework more effective, make investments more sustainable and “foster investment” through insurance companies and pension funds.

The Brexit problem

Amongst the challenges that the plan has faced, the departure of the UK from the EU has no doubt stood out the most.  Brexit is finally explicitly mentioned in the mid-term review, stating that “the future departure of the largest financial centre from the EU makes it necessary to re-assess how CMU can ensure that EU businesses and investors have access to strong, dynamic and more integrated capital markets”. 

The UK contributed a significant portion to the EU’s budget, averaging around €12 billion in EU funding each year between 2011-15. With this loss though, comes opportunity for new capital markets in Europe. In fact, several European cities such as Frankfurt, Paris and Madrid have stepped forward with plans to replace London as the EU’s financial capital. Thus, it is no surprise that new priority initiatives intended to strengthen the CMU action plan against the impending exit of Britain are being formed.

All in all, the EC refuses to let Brexit get in the way of the CMU’s future and, in fact, suggests that Brexit acts as a reinforcement that a “true Single Market” for capital within the EU is more necessary than ever.

Conclusion

Creating a European “single market” with the characteristics of a domestic market has been a core objective of the EU since its creation.  The Capital Markets Union is thus seen as necessary, not only to provide stability, but to homogenise laws within the financial sector.  Naturally, significant obstacles have been encountered as this plan progresses: fragmented markets, legal barriers and institutionalised shortcomings all contribute to the difficulty of implementing this process.

While these were all foreseen, the loss of one of their largest financial contributors has been the most unexpected and threatening to the CMU’s implementation.  But, with this potential setback, the CMU focuses on reengineering the plan, with new key priorities tailored to their new situation.

All in all, the mid-term review sheds a positive light on its progress, with well over half of the 33 objectives accomplished before the 2019 deadline.  The next phase for the CMU will tackle much more ambitious objectives as well as the inevitable departure of the UK but, while challenges persist, the likelihood of a pan-European market remains a possibility.

JWG will be following the progress of the CMU Action Plan and will publish further articles when additional information is released.  To receive these updates and all the latest financial regulation, you can subscribe to our newsletter and follow us on Twitter and LinkedIn.