The European Commission is launching the Capital Markets Union Action Plan today to help build a true single market for capital across the 28 EU Member States. As part of the Juncker Commission priority to boost jobs, growth and investment across the EU, the Capital Markets Union (CMU), a key pillar of the Investment Plan, aims to tackle investment shortages head-on by increasing and diversifying the funding sources for Europe’s businesses and long-term projects. Also published today are the first and most urgent steps in that Plan, such as relaunching sound securitisation markets.
Alternative sources of finance, complementary to bank-financing - including capital markets, venture capital, crowdfunding and the asset management industry - are more widely used in other parts of the world, and should play a bigger role in providing financing to companies that struggle to get funding, especially SMEs and start-ups. Having more diversified sources of financing is good for investment and business but is also essential to financial stability, mitigating the impact of potential problems in the banking sector on companies and their access to finance. For this reason, CMU is also an important part of the work on the completion of the European Economic and Monetary Union.
The Commission also wants to break down barriers that are blocking cross-border investments in the EU to make it easier for companies and infrastructure projects to get the finance they need, regardless of where they are located.
The CMU is a medium-term project but with some important early initiatives. The Commission is today unveiling a first set of measures to relaunch high-quality securitisation, and to promote long-term investment in infrastructure. In addition, the Commission will announce proposed changes to the Prospectus Directive before the end of the year, with a view to making it easier and less expensive for small and medium-sized companies to raise capital.
In addition, the Commission has started two consultations on Venture Capital Funds and on Covered Bonds. And in line with the principles of Better Regulation, the Commission is also launching a call for evidence on the cumulative impact of financial legislation — to make sure that it is working as intended without (for example) overlapping reporting requirements or inconsistencies between the various laws.
The Commission's overall goal for CMU is to create opportunities for investors, connect finance to the wider economy, and foster a more resilient financial system, with deeper integration and more competition. Our approach will be pragmatic, step-by-step, based on rigorous economic analysis and mindful of financial stability risks.
European Commission Vice-President Jyrki Katainen, responsible for Jobs, Growth, Investment and Competitiveness said:
"The most important part of the Investment Plan for Europe is removing obstacles to investment by deepening the single market. During my roadshows, I have heard many times that insurers struggle to invest in infrastructure projects, so I hope that with the amendment to the Solvency II delegated regulation they will have the right incentives for sound investments."
Commissioner Jonathan Hill, responsible for Financial Stability, Financial Services and Capital Markets Union said:
"I want the Capital Markets Union to help European businesses, and our SMEs in particular, have a wider range of funding sources. I want it to give consumers more options for investing their money. I want to knock down barriers to make it easier for capital to flow freely across all 28 Member States."
In February 2015 the Commission launched a consultation on the measures needed to unlock investment in the EU and to create a single market for capital (IP/15/4433, MEMO/15/4434) and related consultations on the prospectus directive and securitisation.
The Commission received a wealth of feedback from businesses, investors, the financial sector, national parliaments, the European Parliament, the Council and European citizens.
The feedback from the consultation showed that a single market for capital would help support more cross-border risk-sharing, create deeper and more liquid markets and diversify the sources of funding in the economy. The respondents to the consultation were in favour of the step-by-step approach proposed in the Green Paper.
The Action Plan is built around the following key principles:
- Creating more opportunities for investors: the CMU should help mobilise capital in Europe and channel it to companies, including SMEs, and infrastructure projects that need it to expand and create jobs. It should give households better options to meet their retirement goals.
- Connecting financing to the real economy: the CMU is a classic single market project for the benefit of all 28 Member States. Member States have a lot to gain from channelling capital and investment into their projects.
- Fostering a stronger and more resilient financial system: Opening up a wider range of funding sources and more long-term investment, ensuring that EU citizens and companies are no longer as vulnerable to financial shocks as they were during the crisis.
- Deepening financial integration and increasing competition: the CMU should lead to more cross-border risk-sharing and more liquid markets which will deepen financial integration, lower costs and increase European competitiveness.
Key early actions are
New rules on securitisation
Securitisation is the process where a financial instrument is created, typically by a lender such as a bank, by pooling assets (for example car-loans or SME-loans) for investors to purchase. This facilitates access to a greater range of investors, thereby increasing liquidity and freeing up capital from the banks for new lending. The Commission is proposing a regulatory framework for securitisation which is simple, transparent and standardised and subject to adequate supervisory control. According to the Commission's estimates, if EU securitisation issuance was built up again to pre-crisis average, it would generate between €100-150bn in additional funding for the economy.
New rules on Solvency II treatment of infrastructure projects
Investment in infrastructure projects is essential for supporting economic activity and growth in Europe, but such projects require large amounts of long-term financing. The insurance industry is well-equipped to provide long-term finance by investing in equity shares as well as loans of infrastructure projects. The Commission wishes to remove unjustified prudential obstacles so that insurers play an important role in European infrastructure projects. Based on the advice of the European Insurance and Occupational Pensions Authority (EIOPA), today’s legislation creates a distinct infrastructure asset class and reduces the amount of capital which insurers must hold against the debt and equity of qualifying infrastructure projects.
Public consultation on venture capital
Small and medium-sized unlisted companies often find it hard to get mainstream financing via bank loans and they do not have access to capital via stock markets: alternatives like venture capital may help them to grow and develop. The existing EU rules, the EuVECA and EuSEF Regulations set up two types of collective investment fund to make it easier and more attractive for private savers to invest in unlisted SMEs. The consultation will ask whether targeted changes to these regulations could boost the take-up of these investment funds. Issues the consultation will cover include the restrictions on who is able to manage the funds, the level of minimum investment of €100,000 for investors, and whether non-EU managers should be able to offer EuVECA or EuSEF. The consultation runs until 6th January 2016.
Public consultation on covered bonds
Covered bonds are a major tool for long-term finance in many EU Member States, to channel finance to the real estate market and public sector. European credit institutions are world leaders in covered bond issuance, but the market is currently fragmented along national lines, which constrains standardisation in underwriting and disclosure practices and creates obstacles to deep, liquid and accessible markets, in particular across borders. The Commission will consult on a pan-European framework for covered bonds; this would build on national regimes that work well without disrupting them and it would be based on high-quality standards and best market practices. The consultation which runs until 6th January 2016, will also seek views on the use of covered bond structures on the back of SME loans. Once the consultation has closed, the Commission will decide whether EU action is needed.
Cumulative impact of financial legislation
The Commission is today launching a "call for evidence" to gather feedback and gauge the cumulative impact and interaction of current financial rules. Through the consultation, the Commission is seeking to identify possible inconsistencies, incoherence and gaps in financial rules, as well as unnecessary regulatory burdens and factors negatively affecting long-term investment and growth.
Highlights for tax
- Remove cross-border tax barriers
- The consultation highlighted some long-standing barriers to cross-border investment, which range from tax, insolvency, through collateral management and securities law to post-trade market infrastructure that prevent a better allocation of capital across borders.
- Key actions targeting start-ups and expanding companies include launching a comprehensive package of measures to support venture capital and risk financing, including catalysing private investment using EU resources through a pan European funds-of- funds, a review of the European Venture Capital Fund legislation and the promotion of best practice on tax incentives
- addressing the debt/equity bias through work on the Common Consolidated Corporate Tax Base (see IP/15/5188).
- Key actions targeted to support institutional investors include gathering evidence on the main barriers to the cross-border distribution of investment funds, including disproportionate marketing requirements, fees, and other administrative arrangements imposed by host countries and the tax environment. Based on the evidence provided, the Commission will seek to eliminate key barriers, through legislative means if necessary.
- Action Plan on Capital Markets Union
- Securitisation proposal
- Solvency II amended legislation
- Public consultation on Venture Capital
- Public consultation on Covered Bonds
- Cumulative impact of financial legislation
- Memo on Capital Markets Union
- MEMO on Solvency II delegated regulation
- MEMO on Cumulative impact of financial legislation
- MEMO on Securitisation
Written by Richard Cornelisse
Richard advises multinational businesses in improving the efficiency and effectiveness of their Indirect Tax Function and Tax Control Framework.
He started his career as a manager at Arthur Andersen and then became an EY partner where he led the indirect tax performance team for Netherlands and Belgium. Currently, he is a managing director of SAP Tax Consultancy Firm.
Richard has over 20 years of experience advising clients on international VAT issues. He is specialized in the tax aspects of financial transformations, shared service center migration, and post-merger integration work.