Does the EU Capital Markets Union Action Plan Answer Investors’ Concerns?
After months of eager waiting, the European Commission published its Action Plan on the European Capital Markets Union (CMU) on 30 September. The main goal of the CMU is to further integrate capital markets across the 28 European Union (EU) Member States to make sure that European investors and companies can better meet their respective funding and investment needs, and to optimize the use of capital markets. The Commission’s aim is to have in place the most fundamental building blocks of the Union ready by 2019.
As mentioned in one of my previous blog posts, the CMU initiative is an umbrella framework that consists of both legislative and nonlegislative initiatives. An example of a legislative initiative is the proposal for a regulation on simple, transparent, and standardised securitisation that the Commission presented together with the Action Plan. A nonlegislative initiative is, for example, a pledge to assess the need for a simple and competitive personal pension product in Europe.
The main areas of focus in the Action Plan are:
- Increasing the funding available for European small and medium-sized enterprises (SMEs)
- Supporting long-term investments in Europe
- Increasing investment and choices for retail and institutional investors
- Enhancing the capacity of banks to lend
- Bringing down cross-border barriers
Between March and April 2015, CFA Institute surveyed our European members to better understand the potential barriers to the Commission’s CMU plans. The key concerns for our members include:
- Divergent tax rules
- Cross-border ownership and transfer of securities
- Divergent national insolvency laws
- Bond market liquidity
- Uncertainty brought by overlapping and uneven legislation
These and a number of other challenges were further assessed in the CFA Institute white paper on the CMU Initiative. While the Commission Action Plan broadly addresses the concerns raised by our members, it is interesting to assess how some of the key challenges are going to be tackled.
Limited Actions on Divergent Tax Regimes
In the CFA Institute member survey, a majority (65%) of the respondents maintained that differences in taxation across the Member States is one of the biggest challenges to creating the CMU. For example, in some EU countries long-term investments are tax incentivised, while in others they are not. Forty-eight percent of the survey respondents noted that the best ways to incentivise institutional investors to invest more in infrastructure projects would be to introduce more favourable taxation treatment and more favourable regulatory capital treatment for investments in infrastructure. The Commission has taken note.
In the Action Plan, the Commission urges the Member States to grant the European Long-term Investment Funds (ELTIFs) the same tax treatment as similar national schemes. The Commission is also presenting revised calibrations in Solvency II legislation to ensure that insurance companies are subject to a more favourable regulatory treatment when investing in infrastructure and ELTIF investments.
In addition, the Commission will undertake a study on discriminatory tax obstacles to cross-border investment by life insurance companies and by pension funds and potentially initiate infringement procedures. The Commission will study how national tax incentives for venture capital and business angels can foster investment into SMEs and start-ups and promote best practice across Member States in 2017. A new proposal on the Common Consolidated Corporate Tax Base (CCCTB) will be prepared in 2016.
While these measures may seem limited to many market participants, it is important to remember that taxation in the EU is solely a Member State competence, meaning that the Commission cannot dictate to national governments how they should arrange their tax regimes. Accordingly, willingness to change taxation rules would have to stem from the Member States themselves.
Hear more on why taxation treatment across jurisdictions is one of the biggest barriers to forming the Capital Markets Union.
Cross-Border Ownership and Transfer of Securities Remain a Focus
As to the cross-border ownership and transfer of securities, the Commission notes that it is aware securities ownership cannot currently be determined with legal certainty when the securities issuer and the investor are located in different Member States and/or securities are held by financial institutions in different Member States. The same concerns were raised in the CFA Institute member survey, where 63% of the respondents considered cross-border ownership rules a major barrier to the development of European capital markets.
The Action Plan notes that the Commission will carry out an impact assessment on the uncertainty surrounding securities ownership in 2016. After that, most likely in 2017, the Commission will propose uniform rules to determine with legal certainty which national law will apply to third-party effects of the assignment of claim (i.e., where the original creditor transfers a debt claim to someone else). CFA Institute finds it regrettable that the Action Plan only initiates limited action in revising securities law legislation.
Part of the cross-border ownership challenges are the differences in national insolvency laws. In the Action Plan, the Commission notes that it will propose a legislative initiative on business insolvency in November/December 2015. The initiative will draw reference from national regimes that are considered to be working well.
Bond Liquidity Concerns: An Upcoming Review
CFA Institute survey respondents also considered reduced bond market liquidity as one of the challenges ahead. Over 70% of the members noted that greater standardisation of issuances to facilitate secondary market trading on electronic platforms and greater price transparency are necessary to promote greater liquidity in corporate debt markets.
In the CMU Action Plan, the Commission notes that in 2017 it will conduct a review of EU corporate bond markets. The review will focus on how market liquidity can be improved, the potential impact of regulatory reforms, market developments, and voluntary standardisation of offer documentation.
Clarity on Overlapping Legislation
In the member survey, one of the key concerns for the respondents was uncertainty over the sometimes overlapping pieces of the European financial services legislation puzzle. One of the public consultations issued by the Commission on 30 September will gauge just that. The Commission is attempting to have a clearer understanding of the interaction of the individual rules and cumulative impact of EU financial services legislation as a whole, thereby providing the basis for any future legislative initiatives. The Commission will also be looking into inconsistencies and gaps in the current legislation. Once the consultation has closed, the Commission is expected to publish its report in mid-2016.
As part of the Action Plan, the Commission also launched a consultation on covered bonds in the EU. The purpose of the consultation is to assess potential weaknesses and vulnerabilities in national covered bond markets as a result of the crisis. The deadline for comments is 6 January 2016.
Moreover, the Commission confirmed that a public consultation on retail financial services will be launched in December 2015. The consultation is expected to focus on the consumer perspective and to analyse how trust and confidence in the retail markets can be strengthened.
Hear more on why harmonized financial services laws across EU Member States are critical to investors.
Prospectus Directive Revision to Follow
In addition to the measures published on 30 September, the Commission is in the process of finalising two other legislative proposals, both of which are expected to be published on 24 November 2015.
In line with our member survey results, the Commission is expected to propose changes to the current prospectus regime to make prospectuses more accessible for investors. The Commission also will publish a legislative proposal on central counterparty (CCP) recovery and resolution.
Through the initiatives set out in the CMU Action Plan, the Commission attempts to create a true single capital market in the EU. Some of the concerns noted by CFA Institute members were addressed, though several challenges remain. European policymakers will now have to ensure that their words are matched with equally credible actions to create markets that are truly safe, transparent, and for the benefit of European investors.
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Image Credit: iStockphoto.com: FrankyDeMeyer