CHAPTER 3: PITFALLS, OBSTACLES AND OPPORTUNITIES |
71. We also highlight some potential pitfalls
and obstacles to a successful Capital Markets Union, as well as
the opportunities it might present.
72. Several seminar participants expressed concern
about any formal pan-EU supervisory mechanism. Hugo Dixon said
that it was misleading to draw parallels with the Banking Union
Single Supervisory Mechanism. He stressed the distinction between
a single supervisor and a common rulebook, but conceded that there
might be a case for supervision of some very technical areas.
73. Sharon Bowles said that the issue of centralised
supervision would inevitably raise its head during negotiations.
Although supervision might be necessary in specific areas, she
said that there was no ready-made body to take on a pan-EU supervisory
function, as the ECB had done under Banking Union. She did not
think that it would be possible for ESMA to take on this role.
74. Charles Roxburgh said that the UK Government
did not think that a pan-EU supervisory framework was necessary
or desirable: the current Member State-based system worked, while
trying to create a pan-EU framework could create a significant
distraction. Phil Evans agreed that, from the Bank of England's
point of view, pan-EU supervision was not necessary. Barnabas
Reynolds did not think that new powers for ESMA were necessary.
Nor was it in the interests of the ECB to become a pan-eurozone
capital markets regulator, given its existing onerous responsibilities.
75. Our recent report on The post-crisis
EU financial regulatory framework made the case for strengthening
the powers, role and resources of the three European Supervisory
We also recognise the principled case for as much consistency
across all 28 Member States as possible. There may well be a role
for ESMA to play in overseeing specific aspects of Capital Markets
Union. Yet a distinction must be drawn between consistent application
of a common rulebook and direct supervision of capital markets
at the EU level. Any attempt to establish a system of pan-EU supervision
would not only be contentious, but could prove an unhelpful distraction
from the necessary reforms that Capital Markets Union is seeking
to bring about.
76. As we have seen, the Green Paper focuses
in particular on the need to improve access to finance for SMEs.
The Commission acknowledges that small and rapidly growing companies
possess low levels of cash flow and depend on external finance
to grow. It is also recognised that bank financing, leasing and
factoring are often not available or sufficient for companies
with significant intangible assets, which can be less easily used
as collateral. The Commission notes that the EU lacks risk capital,
citing the relatively undeveloped venture capital market for SMEs.
77. Many seminar participants highlighted the
importance of SMEs to the European economy. David Doyle said that
they generated 67% of GDP, over 70% of employment and constituted
99.8% of all enterprises. Yet Charles Roxburgh said that the US
experience demonstrated that many small businesses did not and
would not be able to access capital markets. He said that Capital
Markets Union should therefore focus on medium-sized companies.
78. Marte Borhaug, Senior Policy Adviser, Financial
Services at the CBI, said that the focus should be not just on
the size of SMEs, but on whether they wanted to grow. A capital
market needed to focus on companies with the ambition to grow:
companies themselves needed to take the initiative. Sharon Bowles
agreed, and noted that SMEs in the UK and the EU as a whole were
not good at growing from medium to large firms.
79. As we have seen, Andrew Van der Lem said
that there were limited data on SMEs, most of which were held
by banks and not readily available to investors. According to
Jonathan Faull, comparable credit information was needed, though
there was a question as to how much detail was required. Ultimately
the challenge was to keep investors interested without imposing
excessive burdens on SMEs.
80. The term 'SMEs' covers an extremely broad
range of companies, varying not only in size but in their ambition
and motivation to grow. Capital Markets Union is unlikely to benefit
all such companies. Nevertheless, many will be well-placed to
make use of the avenues for access to financial investment that
Capital Markets Union could create. We urge the Commission to
consider how those SMEs who want to take advantage of Capital
Markets Union can be encouraged to do so. Yet ultimately, the
onus lies on SMEs themselves to respond.
81. The Green Paper states:
"European capital markets must be open and
globally competitive, well regulated and integrated to attract
foreign investment, which means maintaining high EU standards
to ensure market integrity, financial stability and investor protection.
Given the global nature of capital markets, it is important that
the Capital Markets Union is developed taking into account the
wider global context."
82. A number of seminar participants compared
the EU and the US. David Doyle pointed out that the US had a flourishing
enterprise culture and ready availability of capital market-based
intermediation funding. He pointed out that in the US 80% of capital
funding came from capital markets and 20% from banks, whereas
the reverse was true in the EU. According to Phil Evans, part
of the reason the US was recovering faster than the EU was because
all the increase in financing for corporates in recent years had
come from capital markets rather than banks, which were deleveraging.
83. In light of these factors, Barnabas Reynolds
said that it was vital to consider how Capital Markets Union would
fit with the US model, in particular from the UK's point of view,
given that London was the gateway to US financial markets. It
was important to ensure that it was not too "European-centric".
Andrew Van der Lem said that the EU could learn from the US model.
Its Small Business Administration played a key role in diversifying
the market, investing in debt funds and lending on to small business,
thus creating a market and a track record which attracted institutional
investors. He thought that the European Investment Bank and European
Investment Fund could play a similar role.
84. Michael Dakin agreed that the Small Business
Administration was a good model, partly because it took the first
loss and spread risk. He also stressed the need for co-ordination
across jurisdictions, not only between the EU and US, but also
with Asia. Disclosure standards in the US, for instance, would
have implications in the EU. Jonathan Faull agreed that the US
had very detailed data requests and they stressed that EU requirements
needed to dovetail with international standards.
85. The EU has much to learn from the development
of US capital markets as a source of funding. The Commission should
look to US models such as the Small Business Administration, to
see if similar programmes can be adopted, whether at EU or Member
State level. The EU must also ensure that Capital Markets Union
contributes to, rather than conflicts with, the development of
consistent international standards. In that light, we stress the
importance of international co-operation and co-ordination, not
only with the US but with other, growing, global markets. A failure
to include financial services regulatory matters in the Transatlantic
Trade and Investment Partnership (TTIP) would be a missed opportunity.
The need for realism
86. Several participants stressed the need for
realism about the challenges that Capital Markets Union would
face. Hugo Dixon said that capital markets were not fail-safe,
and risk could only be reduced rather than eliminated entirely.
Lord Hill said that "nil risk means nil growth, and I do
not want the stability of the graveyard."
87. Participants also said that capital markets
should complement, not displace, the banking sector. Phil Evans
said that the EU's heavy reliance on banks would not change, though
the balance between banks and capital markets could be shifted.
Bernardita Jimenez said that the financial system should be treated
as an integrated whole, not as a collection of silos. As we have
seen, she argued that Capital Markets Union presented opportunities
for banks. Sharon Bowles agreed that banks had a role to play
in growing the markets.
88. Graham Bishop cautioned that similar issues
had been discussed before, in the context of the Financial Services
Action Plan and the Giovannini process:
it was disturbing that barriers like securities law and tax mechanisms,
which had been identified then, were still a problem.
89. William Wright drew attention to the huge
disparities between EU Member States. Whereas the UK stock market
was 130% of the size of its GDP, many Member States had stock
markets comprising only 10-20% of GDP, or even less. Standards,
protocols and systems needed to be introduced for Member States
with under-developed capital markets.
90. Amid the positive reaction to Capital
Markets Union, it is important to retain a sense of perspective.
Significant obstacles remain. Capital markets cannot, and should
not, replace the banking sector, but rather should complement
it as an alternative source of funding for economic growth. It
is important that the financial sector is treated as an integrated
whole, rather than as a set of silos. The state of development
of capital markets varies considerably between Member States,
and the needs, cultures and priorities for Member States without
developed markets will differ significantly from those such as
the UK, where capital markets are relatively well developed.
91. We welcome the short-term initiatives
that the Commission has identified. We also recognise that there
are longer-term, more contentious issues that will need to be
tackled if a true Capital Markets Union is to be created. Yet
the sheer quantity of proposals that the Commission has set out
in its Green Paper creates a danger that Capital Markets Union
could lack focus. A good starting point would be to identify those
measures that are most necessary to support the EU's jobs and
An opportunity for the UK
92. Notwithstanding these caveats, there was
widespread recognition that Capital Markets Union presented a
significant opportunity for the UK. Sharon Bowles said that President
Juncker had acknowledged that Capital Markets Union could not
be achieved without the UK and London. Hugo Dixon said that more
than half of all capital markets activity in the EU came through
the UK. Boosting capital markets would therefore be a fillip to
the UK economy and to the City of London in particular.
93. David Doyle stressed that the UK should act
as a constructive participant encouraging best practice. Charles
Roxburgh said that the UK also needed more effective capital markets,
and could learn from others. Capital Markets Union would help
expand financial centres across the EU, not just the City of London.
The aim was to make the cake bigger for everyone.
94. Capital Markets Union presents a significant
opportunity for the UK positively to promote the importance of
capital markets, benefiting not just the UK economy, but the EU
as a whole. We encourage the Government and the UK financial sector
to do all they can to share best practice with other Member States,
while recognising that the UK can itself learn from others. The
UK must ensure that it is at the forefront of the debate as the
Capital Markets Union agenda takes shape in the coming months.
95. It will not suffice simply to react to
others' proposals: the City and the Government should be active
in responding to the Commission's initiative.
Overview and key conclusions
96. We welcome the Commission's proposals
for Capital Markets Union, as a vital means of unlocking investment
and providing finance for SMEs, with the potential to boost economic
growth in the EU as a whole. At the same time, we make the following
it takes its proposals forward, the Commission must balance the
need, on the one hand, to ensure that companies have sufficient
access to capital and investment opportunities, and are not overburdened
by onerous requirements with, on the other, adequate protection
for consumers and investors.
Commission must also ensure that Capital Markets Union remains
focused on jobs and growth.
Commission is right to propose a balance of short-, medium- and
long-term measures, and legislative and non-legislative proposals,
but must take care that Capital Markets Union does not lose focus
through the sheer number of ideas on offer.
Commission must also ensure that all its proposals are subject
to a rigorous Impact Assessment and cost-benefit analysis.
differentiated approach must be taken, reflecting the specific
characteristics of each element of the EU's capital markets. At
the same time, capital markets should not be treated in isolation,
but rather as an integral set of transactions and relationships
within the wider financial system.
97. Capital Markets Union presents an opportunity
to break down obstacles to the creation of a properly-functioning
Single Market in capital. We will scrutinise the Commission's
proposals closely as they take shape in the coming months. Our
initial assessment of this timely initiative is positive.
78 The post-crisis EU financial regulatory framework: do the pieces fit? Back
COM (2015) 63 FINAL Back
Mr Van der Lem also stressed the work undertaken by the British
Business Bank in the UK in relation to crowdfunding and venture
capital. See Appendix 3. Back
The Giovannini Group was a group of financial market experts,
formed in 1996 to advise the European Commission on financial
market issues. In particular, the work of the Giovannini group
focused on identifying inefficiencies in EU financial markets
and proposing practical solutions to improve market integration.
[accessed 5 March 2015] Back