Insight: “Completing the Capital Markets Union: the Commission’s new Action Plan” by Dolores Utrilla
After the adoption of the euro as a common currency in 1999, the integration of the euro area received a decisive impulse in 2012 with the launch of the Banking Union. However, this still needs to be complemented by a fully-fledged Capital Markets Union (CMU) enabling savers and firms to invest and borrow beyond their national borders. This is an ongoing and complex project which aims to deepen and further integrate the capital markets of EU Member States. It requires the adoption of measures and regulatory amendments in a wide variety of areas and entails responsibilities not only at the EU level, but also at the level of each Member State.
Yesterday, the European Commission presented its much-awaited new package of measures for completion of the CMU. The following paragraphs put this package into context and explain its main contents.
The 2015 CMU Action Plan
The first decisive step for achieving a CMU was the Commission’s initial Action Plan, launched in 2015. Soon after President Juncker assumed office in November 2014, the Commission had laid out its vision for the CMU in a Green Paper noting that, compared to the US, European businesses relied much more heavily on banks than on capital markets for funding. According to the Juncker Commission, a deeper union of capital markets would help unlock more funding for investment and attract portfolio investments from the rest of the world, as well as offer an important channel for risk sharing.
The 2015 Action Plan set out a number of steps for a gradual building of the CPU to be completed by 2019. The Commission’s main goal was to remove national barriers hampering the development of EU-wide financial markets, as well as to reduce dependency on bank financing. More specifically, the Action Plan was articulated around a series of priorities: supporting the financing of firms, particularly SMEs; fostering investment in sustainable projects and infrastructure; removing barriers to cross-border investment; and creating additional opportunities for savers and attracting capital from outside the EU.
The 2017 mid-term review of the CMU project complemented the original Action Plan with additional initiatives. These included, inter alia, measures on pan-European personal pensions, covered bonds and securities, enhancing the supervisory framework for integrated capital markets, and the commitment to strengthen the powers of ESMA in response to Brexit.
Overall, in the 2014-2019 mandate an agreement was reached on most of the 13 initiatives put forward by the Commission to start building the CMU, including proposals on venture capital, securities and crowdfunding. However, by the end of 2019 completing the CMU was still a distant goal, as noted by the International Monetary Fund (IMF). To a large degree, the EU still has 27 capital markets which do not work as one. European finance is still sharply segmented along national lines, with savers and investors depending heavily on national banking systems.
The search for an enhanced CMU strategy and the eruption of COVID-19
Acknowledging that progress in the achievement of the CMU had so far been limited, in late 2019 the Von der Leyen Commission launched a High Level Forum with the aim of providing an up-to-date diagnosis and defining a set of key proposals to give new impetus to the CMU project. The Forum’s final recommendations were published in June 2020, identifying some of the levers that can and must drive the CMU project forward, and placing particularly strong emphasis on the need to strengthen national capital markets to build market finance within the single market.
Meanwhile, in early March 2020, the European Central Bank (ECB) published a report on ‘Financial Integration and Structures in the Euro Area’, finding that the financial structure of the euro area continued to be dominated by non-market instruments and expressing a strong desire to make progress on the CMU project. The Commission also expressed the same need for further integration in its 2020 Annual European Financial Stability and Integration Review.
Although the presentation of a new, comprehensive CMU package was envisaged for September 2020, the impact of the COVID-19 pandemic prompted the anticipated adoption by the Commission of several specific measures in this field. In late July the Commission adopted a Capital Markets Recovery Package, composed of several targeted adjustments to existing EU rules (as explained here). The recovery package was designed to facilitate the recapitalisation of firms, to channel investor funds towards the real sector, and to foster securitisations by institutions.
Beyond boosting these targeted amendments, the COVID-19 pandemic has turned the deepening of the CMU into a key tool to relaunch the EU economy in the aftermath of the crisis. Additionally, some of the key elements of the future CMU strategy started to be deployed during the first months of the pandemic. As explained here, this is particularly the case with the trend towards enhancing regulation and supervisory convergence powers and moving away from directives: ESMA’s approach during the COVID-19 crisis involved use of its supervisory convergence tools to effectively adapt supervision to changing needs – relaxing, extending, or slightly recasting rules so that they work in a crisis context.
The new CMU Action Plan
Following the High Level Forum’s recommendations of last June, the new Commission package responds to the increased need to guarantee the smooth functioning of the CMU as a risk-sharing channel and stability mechanism for the euro area, which has become all the more important in light of Brexit and, even more prominently, due to the situation prompted by the COVID-19 pandemic.
The new Action Plan presented yesterday revolves around three key objectives. The first and top one is ensuring the EU’s economic recovery, as well as that such recovery is green, digital, inclusive and resilient by making financing more accessible for European companies, in particular SMEs. The second objective consists of making the EU a safer place for individuals to save and invest long-term. The third goal of the package is to create a more inclusive and resilient EU economy, as well as to boost the international role of the euro.
In order to achieve these objectives, the Action Plan comprises 16 targeted legislative and non-legislative initiatives by the Commission. The measures announced yesterday include:
- The creation of an EU-wide platform (European single access point) that provides investors with seamless access to financial and sustainability related company information.
- The simplification of the listing rules for public markets, in order to promote and diversify small and innovative companies’ access to funding. To complement the action on listing rules, the Commission will continue its work on creating an SME IPO fund to make it easier for small and high-growth companies, in particular in sectors of strategic importance to the EU, to raise capital and finance their growth.
- The review of the legislative framework for European long-term investment funds, with a view to channelling more long-term financing to companies and infrastructure projects, in particular those contributing to the objective of smart, sustainable and inclusive growth.
- The removal of regulatory obstacles for insurance companies to invest long-term, as well as the provision of an appropriate prudential treatment of long-term SME equity investment by banks. The Commission will also assess possibilities of promoting market-making activities by banks and other financial firms.
- The possible introduction of a requirement for banks to direct SMEs, whose credit application they have turned down, to providers of alternative funding.
- The review of the current regulatory framework for securitisation in order to enhance banks’ credit provision to EU companies, in particular SMEs.
- The conducting of a feasibility assessment for the development of a European financial competence framework, and also for the introduction of a requirement for Member States to promote learning measures supporting financial education, in particular in relation to responsible and long-term investing.
- The assessment of the applicable rules in the area of inducements and disclosure and, where necessary, the proposal of amendments to the existing legal framework for retail investors to receive fair advice and clear and comparable product information. The Commission will also propose rules to reduce information overload for experienced retail investors, subject to appropriate safeguards, as well as to improve the level of professional qualifications for advisors in the EU. The Commission will further assess the feasibility of setting up a pan-EU label for financial advisors.
- The facilitation of the monitoring of pension adequacy in Member States through the development of pension dashboards, as well as the development of best practices for the set-up of national tracking systems for individual Europeans. The Commission will also conduct a study to analyse auto-enrolment practices and may analyse other practices to stimulate participation in occupational pension schemes, with a view to developing best practices for such systems across Member States.
- The proposal for a common, standardised, EU-wide system for withholding tax relief at source, in order to lower costs for cross-border investors and prevent tax fraud.
- The adoption of a legislative or non-legislative initiative for minimum harmonisation or increased convergence in targeted areas of non-bank insolvency law. In addition, together with the European Banking Authority, the Commission will explore possibilities to enhance data reporting in order to allow for a regular assessment of the effectiveness of national loan enforcement regimes.
- The possible introduction of an EU definition of ‘shareholder’ and the further clarification and harmonisation of the rules governing the interaction between investors, intermediaries and issuers. The Commission will also examine possible national barriers to the use of new digital technologies in this area.
- The possible amendment of rules to improve the cross-border provision of settlement services in the EU.
- The proposal for creation of an effective and comprehensive post-trade consolidated tape for equity and equity-like financial instruments.
- The proposal of rules to strengthen the investment protection and facilitation framework in the EU.
- The adoption of an enhanced single rulebook for capital markets, assessing the need for further harmonisation of EU rules and monitoring progress towards supervisory convergence. The Commission will consider proposing measures for stronger supervisory coordination or direct supervision by the European Supervisory Authorities. The Commission will also carefully assess the implications of the Wirecard case for the regulation and supervision of EU capital markets and act to address any shortcomings that are identified in the EU legal framework.
As can be observed, the measures announced yesterday greatly differ in scope, content, and level of detail. The text of each individual proposal is therefore much awaited. In any event, it seems clear that the completion of the Action Plan and the achievement of its ambitious goals will require close attention and support from the European Parliament and from Member States.
Dolores Utrilla is an Associate Professor at the University of Castilla-La Mancha and an Assistant Editor at EU Law Live.