The Capital Markets Union (CMU) action plan
The long and winding road
The European Commission has published the much anticipated action plan for the Capital Markets Union (CMU). There is no big, bold individual step at the heart of the CMU to capture attention. Instead the action plan includes 33 initiatives across six chapters which individually would not carry much weight, but cumulatively have the potential to turn fragmented pieces of legislation into a cohesive regulatory framework “to mobilise capital in Europe” and understand how regulatory reforms are affecting the financial services industry.
The initiatives of the action plan fulfil many of the commitments made at the outset of the CMU; a limited legislative programme, greater emphasis on revision and calibration, and removing barriers to cross-border flows of capital. In many respects the action plan is restrained, taking a pragmatic view of what measures are achievable to make regulation work more effectively for a growing economy while respecting the concerns of financial stability. While some of the initiatives may come to nothing (e.g. those on tax and insolvency) the majority of the proposed initiatives will be welcome to the market, especially the call for evidence on the cumulative impact of regulatory reforms.
Alongside the action plan the Commission also published a bundle of documents forming the first actions on the CMU:
- a legislative proposal on securitisation, including a revision to the capital requirements regulation;
- an amendment to the Solvency II Delegated Act (annexes);
- a consultation on venture capital and social entrepreneurship funds;
- a consultation on covered bonds; and,
- a call for evidence on the EU regulatory framework for financial services.
Revision and calibration rather than new legislation
In launching the CMU Lord Hill stated that there would be no large legislative agenda and he has followed through with this claim. He has proposed new legislation, such as that on securitisation, and some of the proposed initiatives will result in legislation, but the majority of initiatives will, ultimately, lead to the revision or calibration of existing rules.
As examples there are the calibration of the Solvency II delegated act for infrastructure investments and European long-term investment funds (ELTIFs), revising the prospectus directive, and the European venture capital regulation (EuVECA). Scheduled reviews of this legislation are likely to have resulted in revision and calibration; the CMU will also take a holistic view in revising legislation.
Understanding the effect of regulation
The action plan recognises the need to understand the individual and cumulative effect of the post-crisis regulatory reforms, for example the focus on market liquidity as part of the review of corporate bond markets, the call for evidence on the interactions between rules and the cumulative impact of financial reforms, and the comprehensive assessment of EU retail investment products. These initiatives represent a positive change towards understanding how regulation should work as a network. However, this review should not be seen as the Commission putting forward a deregulatory agenda, but about making regulation work effectively.
Focus on barriers
The stated method to build a CMU was to tackle barriers one at a time; the action plan follows through with this commitment. For example revisiting the barriers to cross-border clearing and settlement, reviving plans to tackle issues in the cross-border ownership of securities and the assignment of claims, and the barriers to the cross-border distribution of funds. These measures have the potential to address persistent issues which frustrate cross-border market activity.
The CMU action plan in context
The 33 initiatives in the action plan represent a substantial commitment by the Commission, but the CMU needs to be set in the context of regulatory change as many CMU initiatives will interact with other work streams. For example, the work on corporate bonds will need to be set against the transparency provisions of MiFID II, and strengthening supervisory convergence against ESMA’s new work plan for supervisory convergence starting in 2016.
The debate triggered by the Commission green paper acknowledges that bank-based finance will still be the predominant source of finance in the EU, especially for SMEs, and the action plan reflects this. After all the aim of the CMU is not to replace bank-based finance but to complement it with market-based finance.
The CMU initiatives are not a quick fix and nor will they result in a boost to economic growth in the near-term. CMU is a long-term project, and even if the steps set out in the action plan are followed through it will be some time before the benefits are fully realised.
The action plan is the starting point of the substantive and detailed work which will need to be undertaken over the next four years.
As a first step firms should identify and prioritise initiatives based on the effect on their business model rather than seeking to tackle the initiatives as a whole. CMU will require active and prolonged engagement by the market to ensure the outcomes are targeted, proportionate and ensure financial stability and economic growth for the long-term.