The Capital Markets Union

The Commission wants to unlock funding for Europe’s businesses and to boost growth through the creation of a true single market for capital.
 
To this end, it has recently launched a public consultation (Green Paper) on the opportunities and challenges to building a functioning Capital Markets Union (CMU).
 
The results of the consultation, which will run until 13 May 2015, will feed into the drafting of a CMU Action Plan.
 
This Action Plan, in turn, will set out the Commission's roadmap for establishing a CMU by 2019, through removing cross-border investment barriers and achieving lower funding costs within the EU.

The Commission’s Position

The free movement of capital is still limited, despite being one of the fundamental freedoms of the EU, the Commission believes. Capital markets remain fragmented and are typically organised along national lines.
 
The EU remains heavily reliant on banks, and there is insufficient investor confidence. Furthermore, European capital markets are not competitive enough at the global level. The Commission calculates that if EU venture capital markets were as deep as the US, as much as EUR 90 billion more in funds would have been available to companies between 2008 and 2013.

The proposed CMU would aim to achieve the following objectives:
• Maximising the benefits of capital markets for the economy, jobs and growth
• Creating a single market for capital for all Member States by removing barriers to cross-border investment within the EU and fostering connections with global capital markets
• Building on the foundations of financial stability
• Ensuring effective levels of consumer and investor protection
• Helping to attract investment from all over the world and increase EU competitiveness
The Commission has underlined that legislation is only part of the answer to achieving better integrated capital markets and would also rely on market-driven solutions.

Short-Term Priorities

In order to achieve the CMU, the Commission has identified a number of short-term actions to be prioritised:
• Barriers to accessing capital markets should be lowered, in particular through the review of the current framework on the prospectus regime
• The investor base for SMEs should be widened. Action in this area could help diversify the financing of innovative and high growth start-ups 
• The securitisation market – which consists of pooling together assets such as mortgages for investors to invest in – should be made simpler, more transparent and standardised

Long-Term Challenges

The Commission has also identified long-term obstacles to the integration of EU capital markets that need to be overcome. These fall within three main categories:

Access to Finance

On the demand side, the main challenge consists in improving access to a broad array of financing instruments. The Commission also emphasises the need to address information issues with regards to SMEs, which often lack a clear view of financing opportunities.
 
As regards standardisation mechanisms, the Commission is expecting input from stakeholders on further integration of the covered bonds and the corporate debt markets. The Commission underlines that alternative financing mechanisms such as peer to peer lending and crowdfunding at the national level are yet not compatible with each other.

Supply of Funding

On the supply side, the Commission says that the flow of institutional, retail and international investments should be boosted in order to promote diversification of funding sources.
 
With regards to institutional investment, the Commission wants to see policies that incentivise institutional investors to raise and invest larger amounts in a broader range of assets, in particular long-term projects, SMEs and high-growth start-ups. It also asks about the possible introduction of standardised products to strengthen the single market in pension provision, and the possible development of private equity and venture capitals as an alternative source of finance.
 
The Commission notes that while the EU investment funds framework is a success, costs for setting them up remain high. It welcomes stakeholders’ views on how to provide more incentives to investors to raise and invest larger amounts and in a broader range of assets.
 
According to the Commission, capital-based schemes for personal pension provisions could also play a stronger role across the EU Member States through the implementation of new rules and the exchange of best practices. The Commission underlines the opportunity to foster the development of private equity and venture capital participants as an alternative form of funding to traditional bank loans or issuing debt or equity. 
 
The Commission has put forward proposals to strengthen the links between the public and the private sector and to facilitate exit opportunities in order to increase the scale of venture capital funds.
With regards to international investment, the Commission calls for enhancing the EU’s international trade and investment policy by conducting direct marketing of EU investment funds and other investment instruments and welcomes views on additional measures that should be implemented to increase the attractiveness of the EU market.

Market Effectiveness

The Commission is seeking stakeholders’ views on where single market rules remain insufficiently developed. It wants to see strengthened enforcement of these rules and of the principle of free movement of capital. Also, the Commission notes that it is important that competition among financial service providers is ensured to guarantee a high quality of service at acceptable prices.
 
European Supervisory Agencies (ESAs) should also cooperate to enforce rules through peer-review and follow-up. The Commission welcomes any advice on what role ESAs can play in increasing such convergence and whether their supervisory powers are sufficient. The Commission underlines that data and reporting are also key elements for supporting closer capital market integration.
 
With regards to market infrastructure and securities law, while a regulatory framework is being put in place in the short to mid-term in accordance with the Commission Work Programme, further reflection is needed in a number of fields. These include increased demand for collateral, divergence of legislation that still exists across Member States with regards to investors’ rights, the development of legal certainty in cases of cross-border transfer of claims and the order of priority of such transfers.
 
Company law and corporate governance, which tend to remain the preserves of domestic law and standards, should nonetheless be enhanced at some point, to strengthen minority shareholders’ rights, cross-border mobility and restructuring and solve diverging conflict-of-law rules that lead to legal uncertainty. Harmonisation issues also arise in the area of insolvency, where a minimum standard consisting of early restructuring procedures and ‘second chance’ provision could lead to the emergence of pan-European equity and debt markets.
 
Differences in tax treatment of market participants and types of financing also create obstacles to cross-border investments and specific issues for start-ups, which need further input from stakeholders to be addressed. The Commission finally points out that the EU still lags behind in tackling technological breakthroughs and should better take account of digitalisation to the benefit of more integrated capital markets.

Next Steps

The European Parliament and the Council will decide whether to formally respond to the Green Paper in the following months. The public consultation runs until 13 May 2015.