EU – Baltic States, Financial Services, Funds, Good for Business, Investments, Legislation, Markets and Companies

Capital market union, CMU will complement Europe’s strong tradition of bank financing, and will help to:

- Unlock more investment from the EU and the rest of the world: the CMU should help mobilise capital in Europe and channel it to all companies, including SMEs, and infrastructure projects that need it to expand and create jobs. It will provide households with better options to meet their retirement goals.

- Connect financing more effectively to investment projects across the EU: the CMU is a classic single market project for the benefit of all 28 EU states. The states with the smallest markets and high growth potential have a lot to gain from a better channeling of capital and investment into their projects. More developed market economies will benefit from greater cross-border investment and saving opportunities.

- Make the financial system more stable: by opening up a wider range of funding sources and more long term investment, reduce the vulnerability of EU citizens and companies to banking shocks such as those they were exposed to during the crisis.

- Deepen financial integration and increase competition: more cross-border risk-sharing, deeper and more liquid markets and diversified sources of funding should deepen financial integration, lower costs and increase European competitiveness.

Expected benefits from an integrated CMU in Europe

An integrated and well-regulated CMU should support investment in the EU by unlocking financing for Europe’s businesses, including SMEs and start-ups.

CMU aims to offer investors and savers additional investment opportunities. Households (retail investors) and institutional investors (insurance companies, pension funds and investment funds) should benefit from a greater choice of investments, including cross-border, accessible at lower costs, with effective investor protection.

Financial institutions, investment firms and financial intermediaries should benefit from more competitive, regulated and integrated EU capital markets with greater scale and depth.

Ultimately, as the CMU develops, EU citizens should also benefit from the expected boost to growth and job creation.

However, individual investors and citizens will benefit from the CMU too. The CMU aims to boost investor confidence and offer investors and savers additional opportunities to save for the long term. Retail investors will only invest in capital markets if they trust them and the financial intermediaries operating in them, and believe they can safely secure a better return on their savings.

Retail investors should benefit from a greater choice of investments, greater potential returns, greater risk diversification and lower costs. The CMU should contribute to restoring trust in capital markets, and encourage and enable European households to save more effectively for their retirement.

Key actions targeting retail investors include:

·                     Looking into the possibilities of developing a policy framework to establish a successful European market for simple and competitive personal pensions to complement existing national solutions to save for retirement and determine whether EU legislation is required to underpin this market; and

·                     Exploring, through a consultation to be launched by the end of 2015 on retail financial services and insurance views on how to increase competition and cross-border supply of and access to retail financial products; and

·                     A comprehensive assessment of European markets for retail investment products, including distribution channels and investment advice to identify ways to improve intermediation channels so that retail investors can access suitable products on cost-effective and fair terms. The assessment will also examine how rules should evolve to benefit from the new possibilities offered by online based services.

Start-ups will benefit from CMU as well: innovation and entrepreneurial spirit are key to unlocking Europe’s growth potential. Crowd funding is developing but remains local. Investment by business angels remains small (just € 357 million in 2013) and concentrated in a handful of EU states. Business angels are individual investors, often experienced entrepreneurs or business people, who invest their own money predominantly in seed or start-up companies and usually provide strategic support to the entrepreneurs of the companies in which they invest.

Start-ups with high growth potential but limited working capital may encounter funding gaps at critical moments in their expansion. Venture capital, which typically provides long-term equity finance, has a key role to play in nurturing corporate success. In the EU, venture capital represents only 1 % of outstanding SME financing as compared to over 8 % in the US.

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; and

·                     promoting innovative forms of business financing such as crowd funding, private placement, and loan-originating funds whilst safeguarding investor protection and financial stability.

Small companies will benefit from CMU too. Many European SMEs are struggling to get funding, particularly in those countries worst hit by the crisis. According to “Survey on the Access to Finance of Enterprises (SAFE) 2014”, in the euro area, 35 % of SMEs did not get the complete financing they asked their banks for in 2013.

CMU should help small companies gain improved access to greater finance at reasonable costs by alleviating information inefficiencies. It should also help businesses to tap into more diverse sources of funding from investors in the EU and all over the world.

Key actions specifically targeting small companies include:

·                     modernising the Prospectus Directive to make it less costly for businesses to raise funds publicly, review regulatory barriers to small firms listing on equity and debt markets;

·                     developing Europe’s capacity to link capital-hungry firms with potential investors, including through the possible development of a Europe-wide information system that helps interaction of finance-seeking SMEs and finance providers to find each other through linking up national systems, and working with European banking federations and business organisations to structure the feedback given by banks declining SME credit applications;

·                     promoting advisory capacity in all EU states to assist SMEs that could benefit from alternative sources of finance;

·                     developing a strategy for providing assistance, where requested by the member states with smaller capital markets, to boost local capital markets’ capacity, for example by helping a Member State to grow a local venture capital market;

·                     working closely with the first SME Growth Markets – a new market sub-category created under MiFID II which would apply from January 2017 and which aims to facilitate access to capital for SMEs - to ensure that the regulatory environment for these incubator markets delivers the expected results;

Medium-sized and large companies are benefiting from CMU. CMU will support investors choosing to place larger amounts into capital market instruments. This should create more choice in terms of funding sources for all businesses, including large companies. Deeper and more integrated capital markets will also mean enhanced competition and therefore lower costs for business financing.

Key actions targeting medium-sized and larger companies include:

·                     promoting private placements (i.e. the selling of securities to a limited number of investors), whereby companies issue debt instruments to institutional or other experienced investors, across the EU, building on successful experiences such as the one in Germany and through supporting market-led initiatives such as the one undertaken by the International Capital Market Association (ICMA) to promote the use of standardised documentation;

·                     a review of the Prospectus Directive to reduce the cost and simplify the process of issuing a prospectus (see below);

·                     a review of the functioning of EU corporate bond markets focusing on how market liquidity can be improved, the potential impact of regulatory reforms, market developments and voluntary standardisation of offer documentation;

·                     exploring with the International Accounting Standards Board (IASB) the possibility of developing a voluntary tailor-made accounting solution, which could be used for companies admitted to trading on SME Growth Markets; and

·                     addressing the debt/equity bias through work on the Common Consolidated Corporate Tax Base (see IP/15/5188).

Benefits for institutional investors (insurance companies, pension funds, etc.)

Institutional investors are important to capital markets as they have a natural capacity to invest over long periods of time. This capacity is under-used at present, as reflected in their low exposure to equities. EU insurance companies and pension funds hold respectively some €8.5 billion and €3.5 billion worth of assets. CMU should offer opportunities to institutional investors to take additional exposure to corporate equity and debt, with a view to better matching assets and liabilities.

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;

·                     assessing the case for a policy framework to establish a successful European market for simple and competitive personal pension product to allow institutional investors (insurers, asset managers and pension funds) to increase their fund-raising; and

·                     assessing, following consultation feedback which highlighted that the prudential treatment of private equity and privately placed debt in Solvency II constitute impediments to investing in these asset classes, whether changes are warranted. Possible amendments could be brought forward in the context of the 2017 Solvency II review.

CMU’s support in financing infrastructure projects

The European Investment Bank (EIB) estimates that the total cumulative infrastructure investment needs in the EU could reach up to € 2 trillion up to 2020. Good infrastructure is a key factor supporting sustainable growth. The energy sector needs to upgrade its networks with the latest technologies, integrate renewable sources of energy and diversify sources of supply. The transport sector must modernise its infrastructure, reduce congestion and improve trade links. The environment needs better waste, recycling and water treatment facilities. Europe needs far-reaching and faster broadband and smarter data centres.

Prudential regulation affects the appetite of institutional investors to invest in specific assets through the level of capital charges required. The CMU should help attract additional private capital from institutional investors to finance the realisation of key infrastructure projects through a review of the prudential requirements in Solvency II for insurance companies that invest in infrastructure projects. Such a review should subject insurers that invest in infrastructure projects to a regulatory treatment which better reflects the true risk of infrastructure investments, whether the investment is performed directly by the insurer or through a European Long Term Investment Fund (ELTIF) vehicle.

The Commission will also complete the review of the impact of the Capital Requirements Regulation (CRR) and of the Capital Requirements Directive (CRD IV) on bank lending to the economy and make changes to the treatment of infrastructure in the CRR, if appropriate. That consultation, which was launched in June 2015, includes a review of the impact of the new rules on capital requirements on the availability of financing for infrastructure and other investments that support long-term growth.

Reference: European Commission, Fact sheet, Memo-15-5732 “Questions and Answers on the Action Plan on building a Capital Markets Union”, Brussels, 30 September 2015, in:

 http://europa.eu/rapid/press-release_MEMO-15-5732_en.htm?locale=en