UK: Setting The Scene For The Capital Markets Union

Last Updated: 30 December 2014
Article by Tim Rawlings

Most Read Contributor in UK, August 2017

The Capital Markets Union (CMU) is a flagship initiative in the European Commission's agenda for financial services during the next five years. This "concept under construction" has already caused much debate as stakeholders attempt to define the CMU and set its primary aims and principles. However, the real debate is only just starting. The agenda will evolve rapidly over the coming months with a Commission consultation paper expected in Q1 2015 and a road map in Q3 2015.

To set the scene for the consultation paper, we focus on a stylised view of the CMU as an agenda to develop an integrated and fully developed single EU capital market to promote growth. The CMU will act as an 'umbrella' policy programme, covering existing as well as some new initiatives.

Old wine in new bottles?

The CMU is not a new idea, but the breadth and ambition of this latest iteration of the agenda is. At its heart is the idea of a single EU capital market providing alternatives to traditional bank finance, which currently dominates in the EU. This idea has been an aim of the EU since the 1966 Segre Report ('The Development of a European Capital Market') and it has featured in a number of policy agendas such as the 1999 Financial Services Action Plan. At its core sits the free movement of capital. The CMU represents the rebranding of this old idea and the next phase of integration and development.

To policymakers, while bank finance has a number of advantages (such as overcoming information asymmetries in the small and medium-sized enterprise (SME) market) as banks rearrange their balance sheets in response to market and regulatory pressures, stagnating growth in parts of the EU and high unemployment, alternative methods of raising finance are needed. A successful CMU could result in deeper pools of finance, lower costs of capital, increased SME and infrastructure finance, diversified avenues to raise capital, broader investment opportunities and increased financial stability.

Comparison with the Banking Union

The nomenclature adopted for the CMU and its similarity to the Banking Union naturally leads one to assume the foundations of the two agendas are the same. This assumption is wrong. The Banking Union and the CMU differ in two important ways:

  • The driver behind the Banking Union is to further financial stability while the driver for the CMU is to increase jobs, economic growth and develop a more resilient financial system. As a secondary driver the CMU aims to reduce the dependence in the EU on bank finance;
  • The CMU agenda is seeking to facilitate the growth of new or underdeveloped capital markets while the Banking Union tackles the supervision and regulation of a developed and mature market within the existing market dynamics. 

Identifying these two differences is key to understanding the approach, the likely initiatives and the priorities of the CMU, which does not have a supervisory driven agenda. It is these differences that also underlie the inclusion of all 28 member states.

Scope

As noted above, while the CMU is not a new idea the potential scope of it is. Indications to date are that the CMU will cover inter alia securitisation, private placement, covered bonds, venture capital, private equity, market infrastructure, shadow banking (including securities financing transactions (SFTs) and money market funds (MMFs)), transparency and credit risk on SMEs.

The broad scope of the financing options considered in the CMU is reflected in the mechanisms through which the CMU will be achieved, namely regulation, financial reporting, insolvency law, company law and tax. Tackling the agenda through these methods will pose new practical and political challenges for the success of the CMU.

Given the breadth of scope and ambition of the CMU agenda there is a natural tendency to break it down into segments as above, e.g. securitisation. This is helpful when tackling the detail of initiatives, but if the goal of the CMU is to be achieved then a holistic approach also needs to be taken. Integrating these segments into a network and calibrating existing regimes will be necessary in order to analyse if they will produce the development and innovation desired to finance economic growth.

The broad scope of the CMU and a holistic approach will be key for ensuring finance is available at all stages of business growth, from start-up money to IPO and beyond.

Aligning outcomes to end users

The CMU aims to provide the framework to allow capital markets to develop further. Achieving this will require a cultural shift by businesses and investors. Central challenges to the CMU will be to increase cross border sources of finance and investment opportunities, and to consider alternative sources of finance such as venture capital.

The response to this will require new and innovative techniques from all concerned. Existing regulatory tools are designed for stability in an existing market, not growing what in some respects would be a new market. A risk of the CMU is that the framework for a single EU market is created that is not that required by end users i.e. the corporates seeking to raise finance and investors seeking returns.

CMU initiatives will need to be aligned to the needs of end users. Only by tailoring the framework to end users will they engage with it to develop capital markets.

Financial stability and supervision

Growth must be balanced with financial stability. This means the CMU is not likely to see significant revision or repeal of existing initiatives. As a result of the drivers of the CMU, centralisation of supervision is secondary to a development framework that facilitates the growth of EU Capital Markets. Supervision will remain a central pillar in achieving integration of capital markets and in ensuring financial stability through the existing supervisory structure.

What should stakeholders be doing?

The Commission's timetable to deliver a roadmap in Q3 2015 is ambitious, but given the priority placed on the CMU it is unlikely this timetable will be allowed to slip too far. The scope and goals of the CMU mean it has the potential to have a broad market impact and open up strategic business opportunities for new, or existing, lines of business.

With the consultation paper scheduled in the New Year, now is a prime time for markets participants and end users to evaluate the barriers that need to be overcome to achieve a more integrated EU capital market.  Engaging early to help shape the debate offers the best chance of an effective programme for the CMU.

Reflecting the emphasis placed on the CMU agenda by the Commission to date, its scope, timetable and potential market impact, Deloitte's EMEA Centre for Regulatory Strategy has identified Capital Markets Union as one of the ten key areas of regulatory focus for financial markets in 2015. For more information visit www.deloitte.co.uk/regulatorytop10

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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