The European Commission is publishing its much anticipated Capital Markets Union (CMU) Action Plan today, in the form of a “communication” write John Ryan, Gergely Polner and Ashley Dorrington . That is not a legislative proposal, but it will nonetheless trigger political reactions from the European Parliament (a resolution) and the Council (probably Council conclusions).
We [1] ran a simulation game a few months ago, trying to model what end-users and EU Member States would want from such a CMU. We not only asked end-users to rate which measures would help them, but we also tried to model what Member States would do with these proposals. Not surprisingly, the simulated Council discussions showed that Member States had rather realistic ambitions for the CMU: fine tuning of some existing legislation, a comprehensive impact assessment of recent reforms, sharing non-binding best practice principles and fostering market solutions based on existing national legislation.
Member States were also very clear about what they didn’t want: no new, pan-European capital markets supervisor; no delegation of additional powers to the EU level, particularly in those areas that are deeply entrenched in Member States’ legal systems; and no reduction of the ability of banks to provide further financing to the economy.
Through initial discussions it became clear that a lot of what is needed to deliver a Capital Markets Union can be addressed through either revisions to, or harmonisation of, current legislation. For example, the player for France led a push for infrastructure investments as a policy priority but debate identified that it is the Solvency II rules as well as the EIB mandate that was the basis of the problems.
Principles of best practice were popular. The common feeling was that principles of best practice, if developed by or in consultation with market practitioners, could provide a framework whereby Member States could emulate successful models from other Member States where there is space to do so, but without enforcing the creation of a market where there is no take-up expected, and that doesn’t risk suffocating a new market by introducing regulatory burdens or adding to compliance.
There was a wide agreement that higher levels of financial education would significantly help to increase demand for investing directly into capital markets. If those leaving secondary education were aware of the difference between debt and equity, had a better understanding of financial products on offer to them, and had the risks and advantages of each explained then more would be stimulated to invest directly in capital markets, perhaps seeking a higher rate of return on their investment. However, it materialised in the debate that, because cultural issues are not an EU competency, this could not be driven at the EU level in terms of legislation without requiring treaty change.
Finally, there was a large debate on revision to the Prospectus Directive, a policy ambition already underway at the European Commission. On that topic, in order to ensure harmonisation of prospectuses issued in Europe, and to overcome the legal boundary to delivering a CMU of differing applications between Member States, a ‘Prospectus Regulation’ was considered. Despite some agreement that this could help deliver a ‘Union’ it was argued that it would take a huge amount of work to ‘omnibus’ the different versions of the Directive and so debate on that stopped there.
These proposals are far from some of the ambitious plans raised by commentators, like harmonising tax, insolvency and accounting rules. The simulation also highlighted that lots of the perceived ‘easy wins’ are not quite so easy. There was a lot of discussion on the harmonisation of credit data but in the end it was not successful as it is national accounting rules that would underpin the data – a more difficult problem to tackle than first thought. Further, there was concern that it could lead to a further imposition on banks as they would naturally be in the position to provide the data.
However, coming from this consideration, the debate gave rise to the feeling that a lot more can be done by the European Commission in terms of enforcement, perhaps by using correlation tables to ‘name and shame’ Member States that don’t enforce European law as they should.
The CMU, however symbolic, is a commitment to the Single Market, and to keeping the UK in the EU. It signals a return to a more traditional EU activity of ‘market building’ by creating the necessary legal principles and political trust that enable industry to invest and thrive. If the CMU contributes to a more positive political outlook that encourages companies to invest in Europe, it has already achieved a lot.
The early debate on bank lending vs. capital market based finance will also remain at theoretical level. The majority of EU markets have a historical preference for bank finance, which is not about to change. In some countries (e.g. Germany, Hungary) the recent experience of retail investors or regulatory changes point to an increasing willingness to store money in bank deposits perceived as safer than investing in fund products.
On the level of specific initiatives, the CMU will aim at low-hanging fruit instead of politically sensitive reforms to underlying structures like insolvency regimes, taxation or accounting. In line with this, boosting securitisation and allowing for easier listing are expected to be the first major initiatives. Each is seen as a welcome, though not revolutionary change. The major impact to investment may come from measures on medium-sized and high-growth firms. The smaller end of the SME spectrum, while politically important, offer less obvious solutions and very few low hanging fruit.
[1] The simulation game was organised by the Konrad Adenauer Stiftung in cooperation with Standard Chartered Bank. The proposals in this article do not represent the views of the authors, of Konrad Adenauer Stiftung or of Standard Chartered Bank. They are a summary of the points raised by participants under Chatham House rule.
Professor John Ryan, Fellow, LSE Ideas, Gergely Polner, Head of EU Public Affairs Standard Chartered Bank and
Ashley Dorrington, Head of EU Affairs, British Bankers Association
