The Investment Plan, developed by the European Commission, has the potential to be one of the most important and radical changes to how the European Union operates in the last 25 years. Not only will it seek to harmonise the financial and regulatory barriers to investment, but it will look to harness the collective power of the EU and utilise the full potential of the third-largest economy on earth.
A key element of the Investment Plan is the Capital Markets Union (“CMU”), a revolutionary proposal which seeks to:
- create a more diversified financial system remedies the perceived overreliance on bank lending by developing stronger capital markets;
- realise capital from around the EU which is currently tied up, providing individual savers and businesses alike with more options for investment and funding at reduced costs; and
- establish a genuine single capital market in the EU where investors are able to invest their funds without hindrance across borders and businesses can raise the required funds from a diverse range of sources, irrespective of their location.
On 20 March 2015, The European Union Committee of the House of Lords has produced a broadly welcoming response to the EU consultation entitled, “Capital Markets Union: A Welcome Start”.
If fully formed in the manner proposed, the CMU would acknowledge that a balance must be sought between encouraging issuers into the capital markets space, especially small and medium enterprises (SMEs), and the need to protect investors. It is critical to ensure that regulations concerning consumer protection are not weakened to the detriment of investors. EU policy on financial regulation in general has consumer protection at its heart, and this ethos should continue with the CMU.
With respect to securitisation, the Commission has rightly set about developing a system for building high-quality securitisation. Whilst tarnished as a product during the financial crisis, securitisation has a critical role in creating liquidity in the market and mitigating risk. As proposed, building on the proposals set out by the European Central Bank is an excellent starting point for further reform. The CMU would also seek to develop the private placement market and peer-to-peer lending, both of which have seen an increased amount of activity in recent times. This has the potential to significantly widen access to finance across Europe, especially in nascent European markets.
The optimism surrounding the CMU, however, should be tempered with a dose of realism. Capital markets clearly have their role in the financial markets – a role which will only grow in importance over time. However, the capital markets are not suitable as – nor should they be perceived as – a complete replacement of the banking sector. Instead, the CMU should seek to harness the capital markets as a complementary and distinct source of funding. It should also be noted that the state and development of capital markets Europe-wide is not homogenous and varies greatly between Member states.
These issues could be magnified by the lack of overarching securities and insolvency laws that operate across Europe. The nuances between such widely differing regimes will have to be carefully negotiated in order to make the CMU a workable success across the EU, especially as widespread agreement on reforming these areas will not be easy to achieve.
London is a truly global city and home to one of the world’s most prominent and important financial centres. It is therefore in the interests of the British economy to throw its full support behind the proposals for the CMU, which will benefit the whole of the EU too. In order to utilise this opportunity to its fullest extent, the UK must continue to shape the discourse on these proposals, which can develop the British economy and strengthen the world’s capital markets. Securing a meaningful CMU is a pursuit both fraught with challenges and brimming with opportunity, which will require a coordinated effort from all quarters of the market including, amongst others, governments, financial institutions, investors, regulators, lawyers and other key stakeholders. The Bank of England has described the CMU as a marathon rather than a sprint – and like a marathon – with careful planning and considerable effort, the rewards could be significant.
This blog has also been published on the blog of the Industry and Parliament Trust’s Resilient Futures Programme.