To achieve the objectives of the Capital Markets Union, a sustainable, effective market for retail investments is needed.
The Capital Markets Union (CMU) is a way of creating greater financial integration in Europe. Through restructuring financial institutions exposed by the sovereign debt and global financial crisis, and rebalancing investment funding away from intermediated debt, the reforms set out to expand choices for both investors and savers. Aiming to provide new sources of funding for businesses through stocks and bonds, as well as reducing the cost of raising capital and facilitating cross-border and foreign investment, the project hopes to create a more stable, resilient and competitive EU financial system.
The reform initiative was launched in 2015 and, following a reset of the project in 2017, is now pushing forward as the City of London looks toward making its exit from the European Union. We spoke to Tanya Panovan, Head of the B1 Unit for Capital Markets Union, about whether the project has met its objective targets set for 2019, what the next steps are for the CMU, and what Brexit means for Europe’s financial stability.
How many targets of the Capital Markets Union action plan have been met now it is 2019, and what are the next steps going forward?
The European Commission has delivered all the measures it has committed to. Concretely, the Commission adopted all 13 legislative proposals set out in the CMU Action Plan and mid-term review to put in place the key building blocks of the Capital Markets Union. These include important proposals for the creation of new opportunities across the Single Market for businesses and investors through new EU-wide products and services, simpler, clearer and more proportionate rules, as well as a more efficient supervision of the financial industry. In addition, the Commission adopted three proposals on sustainable finance.
The European Parliament and the Council have agreed on 11 of the 13 proposals on the key CMU building blocks and on two of the three proposals on sustainable finance. The Commission has also worked on more than 50 non-legislative measures in an effort to render rules more proportionate and improve capital markets integration.
The next Commission will decide on future CMU priorities. The work, however, will continue towards creating more efficient, better connected and more liquid capital markets in the EU, leading to easier access for companies to funding and wider investment opportunities for investors across the Single Market.
How is the Capital Markets Union better connecting savings to investment and strengthening the European financial system? How will it diversify funding sources?
Today, European households have one of the highest savings rates worldwide; while at the same time many EU companies continue to rely exclusively on bank financing.
Encouraging capital market investments from European households and savers can contribute to the development of funding sources alternative to bank financing, thus funnelling money into the economy otherwise kept in savings and deposit accounts around Europe. This can help also improve access to financing for small and medium enterprises (SMEs) and benefit the real economy in general by enabling companies to invest and create jobs.
Looking at what has been achieved in the current Commission’s term in this respect, a number of legislative proposals that Council and European Parliament have agreed to contribute to this objective. For instance, the Regulation on Pan-European Personal Pension Product (PEPP) should give EU citizens more choice when planning savings and investments for their retirement. A more developed market for personal pensions in the EU will channel more savings into long term investments and increase the depth, liquidity and efficiency of capital markets.
The new harmonised rules on covered bonds are expected to expand the capacity of banks to provide financing to the real economy and will give investors a wider range of safer investment opportunities. The reviewed rules on cross-border distribution of collective investment funds should also make the cross-border distribution of funds simpler, quicker and cheaper, which will also benefit retail investors. The Commission also presented a legislative proposal on crowdfunding that will help innovative businesses and retail investors; this proposal is however still being negotiated in the Council.
More generally, to achieve the Capital Markets Union’s objectives, a well-functioning market for retail investments that is transparent, competitive, and cost-effective for consumers while at the same time ensuring investor protection is needed. A number of previous initiatives (e.g. UCITS, PRIIPS, MiFID II, IDD) have improved investor protection, introduced better safeguards against misselling and provided for greater transparency of the features, risk/return profile and costs of investment products. Some of these initiatives have only entered into effect rather recently and may, therefore, not yet have produced their full effect in the market. Going forward, we may need to review the interplay of the different pieces of legislation as well as consider if the comparison of the features and costs of different retail investment products can be made easier for the benefit of retail investors.
How does the Capital Markets Union join up with the other two pillars of the Commission’s Investment Plan for Europe?
The Investment Plan for Europe has three objectives: to remove obstacles to investment, to provide visibility and technical assistance to investment projects and to make smarter use of financial resources. This is where the CMU plays an important role. It complements Europe’s tradition of bank financing by deepening financial integration, making the financial system more stable and unlocking more investment from the EU and the rest of the word. Deeper financial integration means that there is more cross-border risk-sharing, deeper, more liquid markets and diversified sources of funding.
By ensuring a wider range of funding sources and more long-term investment, the Capital Markets Union reduces the vulnerability of EU citizens and companies to shocks in the banking sector. Mobilising capital in Europe and channelling it to companies, including SMEs, and to infrastructure projects helps companies to expand and to create jobs. The CMU also aims to direct investment to environmentally friendly projects, thereby contributing to the EU’s sustainable and carbon neutral agenda. It will enable the EU financial sector to lead the way towards a climate neutral, more resource-efficient and resilient circular economy.
How can the Parliament and Member States work together to ensure the success of the CMU? How will it implement cross-border integration considering different legal and tax systems?
A fully-fledged Capital Markets Union requires time. It also requires ambition. The Commission will continue to work in areas that have an important impact on development and integration of capital markets. It will need continued support from European Parliament, Member States and wider stakeholder groups to achieve a genuine single market for capital in the EU. It should also be noted that some issues cannot be immediately addressed through legislative measures at EU level and Member States’ active commitment and engagement to tackle such issues will be essential to the success of CMU.
How will the CMU alleviate the impact of Brexit, considering London as a financial centre? Have CMU plans changed since the vote?
The UK’s departure from the single market calls for a thorough reflection on how to promote an efficient, competitive and integrated financial system underpinned by financial stability and strong supervision. We must accelerate the implementation of the CMU Action Plan so that it has impact on the ground as soon as possible, and be ready to consider new priorities. But we have already come a long way.
From the outset the Capital Markets Union Action plan was based on two pillars: integration and development. We have made progress in this respect and this will alleviate the impact of London’s exit from the EU. In the last three years, the Commission has launched several initiatives to remove obstacles and create incentives for capital market integration in the EU. In order to be able to integrate well, local capital markets need to be strengthened. Each economy needs a well-functioning capital market ecosystem, based on solid regulation and effective supervision.
Tanya Panovan
Head of B1 Unit for Capital Markets Union
Directorate-General for Financial Stability, Financial Services and Capital Markets Union (FISMA)
