Completing the Capital Markets Union: Truth or Dare?

Valdis Dombrovskis

As we approach the home stretch of the ‘Juncker’ mandate, the European Commission last week seized what was widely seen as one of its final opportunities to put forward new legislative proposals in sufficient time for them to be signed off before elections in 2019.

The EU’s executive may have realised just in time that the pace of reform needs to increase if it is to deliver on its ambitious Capital Markets Union (CMU) Plan, before it is too late. To recall, the initiative was launched back in 2015, under then Financial Services Commissioner Lord Hill, with the aim of strengthening the economy of the European Union via stimulating (non-bank) investment so as to create new jobs and growth.

However, fast forward three years and even an optimistic assessment would surely be that “more needs to be done.” In a March 12 press release the Commission stressed the need to complete the CMU in light of the imminent UK departure from the EU, announcing its ambition to have the remaining building blocks of a CMU in place by the end of 2019.

This begs important questions; what has been achieved so far, what remains to be done, and is there enough time left to indeed complete the assignment? Taking a step back, the European Commission assured observers as part of its June 2017 mid-term review of the CMU that more than half of the measures (20 out of 33) announced in the CMU Action Plan has been realized. Among these include a comprehensive package on securitisation, as well as a streamlined regime for prospectuses and EU venture capital / social entrepreneurship funds.

Despite their publication, several other proposed legislative initiatives remain under negotiation and while some are close to being completed, for others this remains a distant prospect. Most notably, the review of the European Supervisory Authorities along with enhanced supervision of EU and third country Central Counter-Parties (CCPs) have both come in for heavy criticism.

What came last week however amounted to the Commission’s attempts to fill in the remaining blanks, with new initiatives launched in the fields of Sustainable Finance, FinTech and a Regulation on Crowdfunding on 8 March. Four days later on 12 March, a new proposed framework on cross-border distribution of funds (UCITS / AIFMD – a Regulation and a Directive), a proposed Regulation on assignment of claims,  a package on covered bonds and a Communication on applicable law on securities ownership were all released.

To round things off, the Commission also stated that all deliverables as originally foreseen in the 2015 Action Plan would be published, with the release of its legislative proposal on SME listing, scheduled for May.

From the outside looking in, this latest flurry of measures could give the impression that progress towards a genuine CMU being established is proceeding at speed. The fact that all may not be as it seems is not to place fault at the Commission’s door, but merely illustrates the scale and technicality of the undertaking.

Alive to this, the tone used in its Communication (“time to accelerate delivery”) shows that the authors of these proposals would like to see an increased number of its proposals being signed than has been the case to date. Yet they are not totally immune to the realities finite time and resources entail; in some initiatives, such as sustainable finance, it appears that the original ambition has been toned back somewhat in comparison with the envisaged plan.

It could also be argued that this is also the case with the AIFMD / UCITS amendments designed to cater for greater cross-border investment fund distribution. At such a turbulent time for European (by geography) asset management, what with the largest hub for such activity in the City of London soon set to be a competitor rather than an asset, this proposal aims to strike at some of the more “low hanging fruit” in this area. While more entrenched issues with both regimes may exist, the risk inherent in fundamentally opening up both regulatory frameworks is simply too great, and would surely kill-off any chance of political agreement being reached before next year.

Despite the undoubtedly ambitious aims of the Commission on the whole, the already intense pipeline of legislative proposals under negotiation within the co-legislators, not to mention the political significance of certain measures renders it unclear – perhaps questionable – whether each and every one of them can be agreed before co-legislators down tools ahead of elections next year.

Nevertheless, it goes without saying that developing and truly completing a CMU was never going to be a straightforward – and quick – process. Member States will need steadfast commitment so as to continue breaking down barriers in this regard and strong political will to create further incentives for small and medium investors to tap into the capital markets, and make the European Commission’s vision a reality.