Europe’s Capital Market Union: Task Force Report Sets out Long-Term Vision

We saw the launch of one of the biggest initiatives in European financial services policy — the Capital Markets Union (CMU) — in 2015. The CMU Action Plan, a roadmap detailing future initiatives, was published by the European Commission in September. Our blog post noted what it could mean for investors. We found it regrettable that the Action Plan initiated only limited action on revising securities law legislation, but we welcomed the revision of the current Prospectus Directive rules.

The Action Plan was followed by a series of policy initiatives, such as one to revise the current Prospectus Directive, and a myriad of public consultations, such as the Call for Evidence on the European Union (EU) regulatory framework for financial services.

Recently, the European Capital Markets Institute (ECMI) and the Centre for European Policy Studies (CEPS) published their take on the CMU initiative so far. The report, Europe’s Untapped Capital Market: Rethinking Integration After the Great Financial Crisis, gathered input from a number of financial services industry participants via the creation of an expert group (the European Capital Markets Expert Group, or ECMEG).

The report presents 36 barriers to the development of a truly pan-European CMU. Many of these barriers were also noted in the member survey that CFA Institute conducted in spring of 2015. The barriers include, among others, different legal frameworks in the EU Member States on business insolvency, different rules and administrative procedures for the establishment and marketing of investment products, and differences in market abuse sanctions among Member States. The CMU will thus be built slowly from the “bottom-up”, by harmonising laws in the Member States and by tweaking existing EU legislation on financial services, rather than by creating a strictly centralised and institutionalised Union from the “top-down”. This also explains why the CMU is a very different undertaking to the European Banking Union.

Three key findings from the report are highlighted below.

Enhancing Role of the Pan-European Supervisor

One of the main recommendations of the ECMEG report is enhancing the role of the European Securities and Markets Authority (ESMA). As noted in our previous blog post, ESMA is struggling to meet its legal mandates and obligations due to the current resource constraints. Because of its understaffing, for example, it must utilise staff from the Member State supervisors, the National Competent Authorities (NCAs), to help develop its policy work.

The ECMEG report also calls for a more independent role for ESMA’s top management, and states that ESMA should become directly responsible for the licensing and ongoing supervision of Undertakings for Collective Investment in Transferable Securities (UCITS) funds and Alternative Investment Funds (AIFs).

The report’s proposal to augment ESMA’s powers is likely to be met with political resistance. The Member States have traditionally held tight to their prerogative to supervise their national financial institutions and to have leeway in the application of EU laws in their national legislation. Nonetheless, it is important to note that a truly integrated, single market for capital will likely require some rationalization or centralisation of supervisory resources.

Further Price Transparency Needed

Another point highlighted in the ECMEG report is the need to improve price transparency in the EU. According to the report, Europe currently suffers from low comparability of both financial and nonfinancial company data as well as credit risk information. The lack of a common informational infrastructure is thus a significant barrier to the creation of a pan-European price discovery process and risk evaluation.

To improve the situation, the report recommends less discretion and greater transparency of internal calculation methodologies for International Financial Reporting Standards (IFRS) reporting as well as a centralised database for company filings and business registries.

CFA Institute broadly supports these recommendations. Comparability across financial statements within, and across, jurisdictions is essential for the financial analyses investors perform during the investment decision-making process. Furthermore, as noted in our consultation response on the revision of the Prospectus Directive, we also support the creation of a centralised online database for prospectuses and company filings.

Differences to the European Banking Union

The report underlines how important it is to note that the Commission’s CMU Initiative is fundamentally different to the European Banking Union. The Banking Union has a centralised governance structure, whereby the European Central Bank acts as the prudential supervisor of financial institutions in the Eurozone and in those noneuro EU countries that choose to join the Banking Union. In addition, the Banking Union is governed by a single rulebook that consists of a set of legislative texts with which all financial institutions (including approximately 8,300 banks) in the EU must comply.

The CMU, on the other hand, is unlikely to have a central governance structure, apart from a possibly enhanced role for ESMA. The CMU is also constructed in a piecemeal fashion, with dozens of separate issues tackled concurrently. Moreover, the CMU is unlikely to have a single rulebook, but the barriers to the single capital market are rather removed by revisions to a number of current pieces of legislation. Finally, the CMU will have implications to all the 28 EU Member States, rather than just the Eurozone countries.

CFA Institute welcomes the ECMEG report and several of its policy recommendations. As noted in our initial response to the CMU framework, we firmly support the removal of barriers to cross-border capital flows and more integrated markets in Europe. We further hope that at least some of the policy recommendations in the ECMEG report will be noted in future initiatives under the CMU umbrella.

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