By Julian Müller, SOMO
Capital Markets Union (CMU) – the Commission’s project for creating an integrated and expanded or “deeper” capital market across all EU Member States by 2019 (e.g. for increased issuing and trading of shares) – has entered a new phase with the release of the CMU Action Plan on 30 September 2015. This plan sets the agenda for the next four years in detail, including a comprehensive timetable. That the CMU is in fact an umbrella term for an agenda comprising a wide range of regulatory measures in a disparate range of areas was always clear, but it has been made more obvious by this release, which lists 33 different work streams, grouped under 20 different detailed objectives to be achieved, which are in turn grouped into six overarching goals. Some of these may even become more differentiated as work progresses.
Two legislative proposals
Work has already started in a number of areas. Together with the Action Plan, the Commission also released two legislative proposals: (1) A proposal for a regulation for “simple, transparent and standardised” (STS) securitisation (converting illiquid assets into tradable securities – which was at the core of the 2008 financial crisis), along with an accompanying proposal to amend the Capital Requirements Regulation. The idea behind the latter is that more favourable capital requirements would make it more attractive to invest in securitisations that qualify for the STS label. (2) An amendment to the delegated Act on Solvency II, the EU’s most important law on insurances. Similar to the suggested amendment of the Capital Requirements Regulation, this amendment primarily aims to make investment into a newly defined asset class of “infrastructure investments” more attractive for insurers by lowering capital buffer requirements. However, it also extends preferential treatment to investments in a number of other assets, including the planned European Long-Term Investment Funds, a mix between risky hedge funds and public funds that are supposed to invest cautiously for the long term.
In addition, the Commission released reference documents for three public consultations (all with the deadline 6 January 2016): on the already existing venture capital and social entrepreneurship funds, which is meant to result in a proposal for a package of measures to support venture capital financing and on a possible pan-European framework for covered bonds (bonds that are backed by high quality collateral).
A third consultation relates to the state of the regulatory framework for financial services and is particularly important, because it calls on the public and the financial sector to provide the Commission with information on the cumulative impact of financial regulation in recent years. The underlying assumption seems to be that regulation that was introduced after the crisis to improve financial stability has created barriers to economic growth and “unnecessary regulatory burdens”. While this consultation is unrelated to CMU in terms of substance – it is not about capital markets as such – it also seems based on the assumption that there is a trade-off between growth and stability and that the scales need to be tilted in favour of the former again. This raises fears that this consultation could inaugurate a process of financial deregulation or a reversal of the already unambitious post-crisis reforms.
Apart from these work streams, there are two more legislative releases before the end of 2015: (1) a proposal was published on 30 November 2015 to change the Prospectus Directive, which will make the production of prospectuses – frequently large documents that issuers of shares or other tradeable financial instruments must publish to give potential investors the information they need to make their investment decisions – less cumbersome for SMEs, and (2) a Green Paper on “retail financial services and insurance”; in other words: the financial services that regular people buy to save for old age or secure themselves against life risks.
The Commission appears to be intent on wasting no time, and it clearly feels empowered by what it describes as “universal support” for CMU (Action Plan, p. 4). However, many NGOs have expressed concerns about the Commission’s plans, including the World Future Council, Reseau Financite, SOMO, Non Con I Miei Soldi and Finance Watch. Among these concerns is a point that has been made by many economists since as early as the 1980s, and which has recently been confirmed in studies by, amongst others, the OECD, the IMF and the Bank for International Settlements: that the growth and increasing importance of the financial sector (and capital markets in particular) in recent decades is negatively related to investment, innovation and growth. Moreover, on the occasion of the release of the Action Plan, a group of NGOs and trade unions also published a joint statement. They conclude that
“CMU revives pre-crisis trends without adequately integrating the lessons from the crisis. It also marks a shift in the political momentum towards short-term growth and competitiveness at all costs, when what is needed is long-term sustainable development of the economy”.
In the weeks and months ahead, the task of those who are not part of the non-existent consensus will be to make their voices heard in public to make their voices heard in public to make the claim of universal support for CMU untenable.