Halfway there: the Capital Markets Union (CMU) plan

The Capital Markets Union (CMU) is the European Commission’s (EC) plan to mobilise capital in Europe through growth, reduce the EU economy’s reliance on banks for loans and create jobs, including youth employment. Heavy reliance on the banking sector for funding needs remains, which is why one of the main actions in the CMU plan is its reduction. This reliance will make economies vulnerable should bank lending tighten, as happened during the 2007-08 financial crisis. Reducing the reliance means there will be a diversified capital allocation, therefore, if another severe financial crisis were to occur, the impact would be less systemic. The EC aims to establish these objectives by 2019.  We previously published an article on the CMU back in July 2015 but what progress has been made since then?

The EC released its public consultation on the CMU Mid-Term Review in January 2017 and had their public hearing on 11 April 2017. The EC aims to publish the Mid-Term Review of the CMU Action Plan in June 2017.

The CMU Action Plan of September 2015 set out 33 actions that need to be put in place in order for the CMU objectives to be met. So far, around 15 initiatives have been completed – almost half of the proposed actions. According to the consultation paper, several more will be completed in the coming months.

The six principal areas of the CMU Action Plan are:

  1. Financing for innovation, start-ups and non-listed companies
  2. Making it easier for companies to enter and raise capital on public markets
  3. Investing for long-term, infrastructure and sustainable investment
  4. Fostering retail investment and innovation
  5. Strengthening banking capacity to support the wider economy
  6. Facilitating cross-border investment.

Key challenges remain, despite the estimated 15 completed initiatives. Challenges highlighted are:

  • Bank credit is more difficult to obtain for young companies
  • Public markets are underutilised for small and medium-sized enterprises (SMEs)
  • Lack of funding for infrastructure
  • Low-carbon transition
  • Demographic ageing
  • Lack of confidence in capital markets
  • Securitisation markets remain impaired due to the concerns over the securitisation process and the risks involved (which was one of the causes of the 2007-08 financial crisis)
  • A need for companies to access alternative sources of funding
  • Obstacles regarding national laws (insolvency, collateral and securities law, as well as market infrastructure and tax barriers).

As promoting innovation and broadening the range of financing options available to SMEs are part of the CMU plan, this would not only drive growth in the economy but could also encourage more established companies to partner with start-ups.  As mentioned previously, one of the main challenges of funding RegTech was that there are biases against start-ups and firms need to be more open-minded about working with SMEs.

The EC released a report last month focusing on the obstacles to investment and outlining a way to remedy this.  The report highlighted the three main barriers: ex ante barriers (when investors consider engaging in cross-border activity), in itinere barriers (what deters investors from maintaining or increasing their cross-border activity) and ex post barriers (what difficulties investors come across at the end of the investment process).

Overall, the key difficulties that were highlighted in the report were the limited geographical distribution of funds, residency and location requirements for certain jobs, insufficient financial literacy, especially with the increasing number of complex financial products, and the differences in national insolvency regimes.  The EC expects Member States to agree on a roadmap and take actions in order to overcome these obstacles.  The roadmap is set to be drawn up before 2019.

The CMU plan is perhaps more important than ever as the UK’s departure from the bloc could “deprive the EU of its largest financial centre.” According to Reuters, “the plan has so far made little headway.” The plan has been further weakened by Brexit but the European Commissioner, Valdis Dombrovskis, has noted that the EU will focus more on risk finance and green and infrastructure projects, and will continue to foster investment by lowering capital markets and favouring the growth of alternative sources of funding to reduce the reliance on banks.  According to the consultation, the “CMU sits at the heart of the EU reform agenda for a deeper and fairer Single Market, and remains a flagship priority,” so we could see further progress made over the coming months.  The CMU plan may allow RegTech start-ups to flourish through innovation and broadening of the range of financing options available to SMEs.

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