Creation of a Capital Markets Union – The European Commission’s Mid-Term Review

On 30 September 2015, the European Commission adopted its “Action Plan on Building a Capital Markets Union“ (available here), which is to be fully implemented by the end of 2019. In its mid-term review, published on 8 June 2017 (available here), the European Commission listed the measures already implemented and at the same time revised and supplemented the existing action plan. The priority actions of the mid-term review underpin the European Commission’s economic analysis of the underlying long-term trends and capital market failures within the financial system. New developments, such as Brexit and the increase in technological progress in the financial services sector (“FinTech”), were also taken into account.

What is the action plan on building a capital markets union?

The action plan is a concept implemented by the European Commission, consisting of a catalogue of regulatory and non-regulatory measures. The Commission’s overarching objectives include greater support for public and private investments and a sustainable financial integration process to stabilize and improve the functioning of Europe’s financial system. These long-term objectives are to be achieved through a more competitive, efficient, stable and integrated capital markets environment. Operational objectives include greater data availability and comparability on a cross-border basis, easier and fairer access to markets and products and stronger enforcement of rules and procedures to achieve greater legal certainty and investor protection.

What are the areas of intervention?

In its mid-term review the Commission has identified several areas of intervention; the priority actions are included within each, which are defined as follows:

• One of the key areas is the strengthening of the capacity of EU capital markets. The aim of the Commission is to reduce existing hurdles for cross-border investment by reducing compliance and operational costs. One cost factor is the different legal requirements resulting from inconsistent transposition of EU Directives into national legislation. The Commission, therefore, sees a priority in reducing these differences by transferring exclusive power to pan-European supervisory authorities and harmonizing the legal framework (keyword: ”Single Rule Book”). In the third quarter of 2017, the European Commission will propose a legislative amendment to the rules on the operation of the European Financial Supervisory Authorities (“ESAs”). Among other things, plans are underway to expand the powers of the European Securities and Markets Authority (“ESMA”), potentially including a direct supervision as currently implemented for rating agencies and product intervention in a comparable way. The Commission also attaches great importance to the promotion of local and regional capital markets, particularly in the central, eastern and south-eastern regions of Europe. To that end, it will present a comprehensive strategy in the second quarter of 2018.


• A further focus is on supporting the financing of innovation, start-ups and small to medium sized firms (“SMEs”) because regularly there is no sufficient borrowing by banks to finance SME’s (e.g. through loans), particularly in their initial stages. The reform of the European Venture Capital Funds (“EuVECA-Funds”), which is designed to simplify the registration and cross-border marketing of these funds, to promote investments in SMEs, has already served this goal (see Noerr Newsletter September 2016, available here). In addition, the Commission will also examine how FinTech can support the financing and cross-border activities of SMEs (e.g. through the creation of an EU-wide legal framework for the approval of FinTech activities and the allocation of a “European passport”).


• Also, the Commission intends to facilitate companies to enter and raise capital on public markets. In its mid-term review, the Commission points out that SMEs still face structured barriers to access public capital markets due to higher information asymmetries, high fixed costs and the weak demand from institutional and private investors. It intends to create a more adequate regulatory environment which makes IPOs more attractive for SMEs while still providing sufficient protection for investors. With the reform of the Prospectus Regulation, which is to be fully implemented by 21 July 2019, initial steps have already been taken to facilitate capital market access for SMEs (see Noerr Newsletter October 2015, available here, and July 2017 edition, available here). The Commission will also submit a legislative proposal to review the supervisory treatment of investment firms under CRR/CRD. This project could lead to a reduction in regulatory requirements to a more appropriate level for the size and nature of the investment companies.


• The Commission also intends to take some measures to support long-term investment, investment in infrastructure and sustainable investment. Measures in this area comprise amongst other things an assessment of the drivers of equity investments by pension funds and insurance companies, the amendment of the prudential treatment of private equity and privately placed corporate debt and measures to review the calibration of risk charges for infrastructure corporates.


• The Commission considers that there is currently too little private assets invested in the European economy through capital markets. A core area is, therefore, the promotion of such investments, for example through the development of the pan-European pension product (“PEPP”).


• A further objective is to strengthen the banks’ capacity and thereby increase their willingness to grant loans (especially to SMEs), thus strengthening the wider economy. Covered bonds (which comprise among others German Pfandbriefe) play an important role. They represent an important source of financing for banks. At present, investments in covered bonds associate high costs due to the regulatory convergence between the Member States. Therefore, a legislative initiative for 2018 is intended to create a union-wide legal framework for covered bonds. In addition, the Commission would like to improve the functioning of secondary markets for non-performing loans by implementing higher transparency, as these loans severely burden the banks’ balance sheets. The year of 2018 could also entail a legislative initiative with the intention of making it easier for secured creditors to assert their guarantees against companies.


• The last core issue is the facilitation of cross-border investments. Among other things, the Commission intends to put forward a legislative proposal specifying conflict of laws rules for third party effects of transactions in securities and claims. It is also considering a legislative proposal to improve the cross-border distribution of alternative investment funds (”AIFs”) and undertakings for collective investments in transferable securities (”UCITS”), as well as their supervision. However, further measures are also being taken in fields such a tax and corporate governance.



Outlook




The creation of the Capital Markets Union is a major project which, because of its complexity, requires many individual measures in different regulatory areas. The mid-term review indicates that the Commission tends to increasingly draw on regulatory measures on a supranational level in order to create a Capital Markets Union. This may be due to the huge disparity in the mode of operation of financial regulators as well as a concern that national regulators will be competing on regulatory and supervisory standards as they seek to attract UK business post-Brexit. We will keep you informed about further developments.