25 June 2020

CMU report June 2020: signposts for a European future?

“The Capital Markets Union is a major element of our post-coronavirus recovery strategy. Savers and investors will play a vital role in getting the economy moving again and they need to have the confidence to invest through capital markets. And companies need to be able to access diversified sources of market-based financing anywhere in the EU. The CMU can be a game changer provided we now make meaningful progress.”
Valdis Dombrovskis - Executive Vice President, European Commission (incl. CMU responsibility)

“The report has very precise and clear recommendations on what should be done in order to move Europe forward. We emphasise that this is not a menu from which one can order two or three courses, and go home satisfied. The 17 clusters of measures are mutually reinforcing, and dependent on each other”.
Thomas Wieser, Chair of the CMU High-Level Forum.

By Mark Kilbride

1. Context

The Capital Markets Union (CMU) is a wide-ranging initiative launched by the European Commission (EC) in 2015 to deepen and further integrate the capital markets of EU member states.

The original CMU objectives (set for completion by 2019) were:
• provide new sources of funding for businesses, especially for small and medium-sized enterprises
• reduce the cost of raising capital
• increase options for savers across the EU
• facilitate cross-border investing and attract more foreign investment into the EU
• support long-term projects
• make the EU financial system more stable, resilient and competitive

CMU subsequently evolved to encompass Sustainable Finance and a pan-European Pension product. However, the Economic and Financial Affairs Council (ECONFIN) concluded last year that not all CMU objectives had been met and assembled a senior High Level Forum (HLF) of industry experts to conduct a full review.

Meanwhile, the European Union itself continues to face major challenges from global competitor economies, an unplanned coronavirus outbreak plus the unresolved departure of one of its more prominent members.

The HLF has now taken these factors into consideration, presenting the EC with a 129 x page report which outlines their CMU recommendations going forward. A call for feedback is now underway on their findings (ending 30 June 2020).

2. Recommendations (in a nutshell)

The HLF proposes a targeted plan of 17 x key measures, to “form an integrated package”. These can be summarised per category (linking to CMU review subgroup) as follows:

A) Creating a vibrant and competitive business environment (c/o Capital Raising Ecosystem subgroup)
1. An EU Single Access Point
2. European Long-term Investment Funds
3. Encouraging insurers to providing more financing for capital markets
4. Market making and re-equitisation of markets
5. Scaling up the European securitisation market
6. Improving the public markets ecosystem
7. Crypto/digital assets and tokenisation

B) Building stronger and more efficient market infrastructure (c/o Capital Market Infrastructure subgroup)
8. Central securities depositories regulation
9. Shareholder identification, exercise of voting rights and corporate actions
10. Cloud (c/o FinTech subgroup)

C) Fostering retail investments in capital markets (c/o Retail Investor Participation subgroup)
11. The area of pensions
12. Financial literacy/education and investment culture
13. The area of distribution, advice, disclosure
14. Open finance (c/o FinTech subgroup)

D) Going beyond boundaries across the internal market
15. Withholding tax (c/o Capital Market Infrastructure subgroup)
16. Insolvency (c/o insolvency subgroup)
17. Supervision (c/o Supervision subgroup)

3. Items of particular note

Perhaps of most initial interest to Kneip (and their clients) are those HLF recommendations covering distribution, advice and disclosure. These include the creation of a MiFID II non-professional qualified investor category (before end-2020) along with a PRIIPS level-1 review “as soon as possible”. The HLF request a “profound analysis and assessment of the current disclosure frameworks, their inconsistencies, gaps, overlaps and redundancies and their effect on the ability of retail investors to make well-informed decisions by end of 2021, followed by Commission legislative proposals by end of 2022.”

There are also legal indicators for a rebooted ELTIF product (a type of AIF), a proposed regime for crypto / digital assets (including updates to UCITS and AIFMD risk articles) and voluntary standard contract clauses for cloud outsourcing before end-2020.

Of interest elsewhere is the cited need for an EU Single Access Point (ESAP). This would be based on “financial and sustainability-related information” and “standardised” reporting data, fed by “existing national and EU registers and databases of company data …interconnected” with data types “expanding progressively and gradually over time.”

In addition, there is also a requirement for wide-ranging measures to tackle the current EU financial literacy / education and investment culture, while both ESMA and EIOPA frameworks should be fundamentally re-structured to enable supervisory convergence and facilitate a single EU rulebook. Meantime, driven by the enfolding Covid-19 pandemic, there should also be a new, stand-alone Directive on insolvency.

4. Concluding thoughts (for now)

“No Member State nor group of Member States can manage the current crisis, Brexit and the recovery, alone.”

“The structural changes imposed by Brexit could exacerbate the weaknesses of EU financial structures and – if not timely addressed – the competitiveness of the overall EU economy. ”

“Mastering and leading digitalisation is critical for the EU to be competitive at the global level. This is another element of Capital Markets Union, part of the EU’s Digital Agenda.”

“Capital Markets Union is vital to attain sustainable growth in the EU. Only sustainability can ensure prosperity in the longer run. Capital Markets Union is needed to deliver the EU New Green Deal.”

The EU needs now rapid and bold measures to tackle these immediate challenges.”

Inevitably, the HLF report is somewhat overshadowed by recent events, including evolving Brexit and global pandemic challenges. However, it also very much forward-looking and ambitious in scope, containing a series of interlinked CMU transformations: plotting Europe’s journey to a climate-neutral society, outlining a digitalisation of the financial sector while managing a transitioning of its legislative framework (i.e. moving from regionally customised Directives to uniformly-supervised Regulations).

While there are many referrals of the need for EU capital markets and infrastructure to become more “competitive” and “efficient”, there is also a bold pitch to directly engage EU citizens with CMU measures to achieve greater social inclusion and reduce inequality to “…empower the EU to build an economy that serves its citizens fairly”.

If these are to be attainable, the EU Institutions (Commission, Parliament and Council of member states) must secure political backing (“timely, full and unwavering”) as a matter of “critical” importance.

The EC has now pledged to “carefully consider each of the recommendations” ahead of issuing their next five year CMU Action Plan in early autumn 2020. Considering the Capital Markets Union’s difficult inception period and those substantial challenges it continues to face, the forceful opening statements of its leaders above strongly indicate the Commission is not inclined to set aside any of the HLF’s key proposals over the next few months.

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