The European Commission, which was inaugurated in November 2014, has established a number of priorities for its term, with two of them being especially highlighted – jobs and growth in the European Union. The Commission has identified various strategies it intends to facilitate in order to reach the set goals. For the strengthening of the long-term investments in the EU, as well as for instituting a single framework for capital markets, the Commission has proposed the establishment of a Capital Markets Union, compromising of all Member States (the “CMA”).
Incentives for the creation of the Capital Markets Union
Various obstacles, particularly related to capital markets, were identified as hindering the development and strengthening of the European Union. First of all, compared to other regions, the capital market’s financing in Europe remains relatively undeveloped. Further, businesses continue to be heavily reliant on funding from traditional sources in the form of banks. It should be also noted that the lack of investor confidence further affects the status of the European economy. Thus, in order to address the abovementioned issues, the European Commission has identified several key principles, it will implement in the establishment of the CMA, namely:
- Maximization of the benefits of capital markets for the economy and employment in the EU;
- Removing barriers to cross-border investment in the EU;
- Drafting a single rulebook for financial services in order to ensure financial stability;
- Establishing an adequate level of consumer and investor protection;
- Attracting investment from outside the EU.
Hindrances for the establishment of the Capital Markets Union
However, the creation of the CMA is currently hindered by a number of obstacles inherent to both the EU and individual Member States. In first place, the capital markets, as they stand now, are largely underdeveloped and/or fragmented. The main reasons for this are regulatory and legal barriers that are existent in many Member States, accompanied by an increase in interconnectedness between banks, which results in an ever-growing systemic risk. Specifically, fragmentation relates to the fact that in most EU countries markets are limited to companies inside their borders, which in turn results in the markets’ small sizes. As to legal burdens to developing functioning capital markets, they are categorized in the following way: (i) different regulation and supervision procedures; (ii) non-harmonized frameworks for financial instruments and collaterals; and (iii) diverse company law and corporate governance rules.
Different regulation and supervision procedures
Although significant efforts have been made in relation to the establishment of harmonized regulation and supervision rules as to capital markets, their application from one Member State to another differs a lot. Thus, the creation of a single rulebook on supervision and regulation, which will be applicable on a supranational level, has been a largely discussed topic. The drafting of such a rulebook will ensure maximum convergence between Member States in the application of the already established frameworks. In addition, this rulebook shall remove national barriers that may hinder the free movement of capital. This is aimed not only in increasing the trade on the internal market, but also at attracting investments from outside the union. Having legislation that ensures conformity between Member States will also aid competition between individual capital markets, which will only result in a better economic climate for SMEs looking for funding.
Diverse frameworks for financial instruments and collaterals
The frameworks governing specific financial instruments are highly fragmented between Member States, and in some cases are even lacking. The areas which are the most problematic relate to information requirements and provisions that ensure investor’s protection. The issue with the improvement of supply of information and access to information is currently addressed by the Commission in the form of the delegated acts on Solvency II Directive (2009/138/EC) and Liquidity Coverage Ration Regulation (2013/575/EU). However, this legislation is only a stepping stone for reaching the right balance between the benefits and risks of securitization, which shall lead to the development of an active secondary market. As to investors, the main issues that remain are increasing their safety through the establishment of legal certainty in all Member States as well as having a relative comparability of securitization instruments. Furthermore, investors remain non-informed about the various national legal requirements as to the different types of instruments, as well as they lack clarity as to the diverse forms of collaterals in the Member States. This in turn leads to problems with the assignment and transfer of collaterals between companies established in different EU countries, which is in its essence a significant problem for trade in the internal market.
Diverse company law and corporate governance rules
It has been a long-standing status quo that national authorities regulate most of their company laws. The harmonization on EU level has been only moderate and restricted to very specific rules, and these differences make it a tedious task in many Member States to establish a company. Next, companies, especially the small and medium sized ones, are still faced with significant constraints when it comes to cross-border restructurings. This issue needs to be addressed with more advantageous frameworks on international establishment, allocation of registered seat, as well as corporate taxation. As to corporate governance, the main problem for the EU countries remains the lack of clearly defined rules on minority shareholder’s protection. This issue is currently being dealt with with the ongoing revision of the Shareholder Rights Directive (2007/36/EC), particularly addressing the expertise level of board members as well as their independence from the shareholders of the company. Moreover, company law remains outdated in terms of employing technology at a sufficient level. Access to information on companies, procedures for establishment of legal entities online as well as casting shareholder’s votes electronically remain as outstanding issues. Steps have been taken to address these with the requirement of providing online information on limited liability companies (the Business Registers Interconnection System) and information as to issuers on regulated markets (revised Transparency Directive (2004/109/EC)).
The European Commission has set the beginning of 2019 as the intended starting date for a functioning Capital Markets Union. In light of the above, the Commission has already initiated two consultation procedures in relation with establishing an EU wide securitization framework and revising the Prospectus Directive as it stands now, whereas the final date for submitting responses to both consultations is 13 May 2015. Following the end of these consultations, the Commission is expected to present the future steps it will take in the establishment of the Capital Markets Union.