Annexes to COM(2020)590 - Capital Markets Union for people and businesses-new action plan - Main contents
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This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2020)590 - Capital Markets Union for people and businesses-new action plan. |
|---|---|
| document | COM(2020)590 |
| date | September 24, 2020 |
1.Measures to support a green, digital, inclusive and resilient economic recovery by making financing more accessible to companies
The strength of the post-COVID-19 economic recovery will crucially depend on the availability of sufficient funding for EU companies. European banks are now better capitalised than before the last financial crisis. Furthemore, the EU has put forward measures to improve their ability to channel funds to companies and households. However, the corporate sector will enter the recovery with higher debt levels and will need more equity investment. The high level of domestic savings and openness of the EU financial system to global investors should help to provide this funding.
Funding for companies through bonds and private equity has increasingly played an important complementary role to bank lending in recent years. This is also thanks to measures taken under the first CMU action plan. Nevertheless, access to some forms of funding, such as public equity, remains limited. The new measures put forward by this action plan aim to further facilitate the use of market funding and to help companies make use of all available funding sources.
To make companies more visible to cross-border investors, better integrate national capital markets and facilitate their access to market funding, the legal environment needs to deliver the right balance between providing relevant information about investment opportunities to investors, on the one hand, and minimising the burden for companies to report this information, on the other.
The Commission will tackle the lack of accessible and comparable company data for investors. Fragmented access to scattered company information and lack of corporate credit ratings dissuade cross-border and global investment and puts in particular smaller national capital markets at a disadvantage. Seamless, EU-wide access to company data in comparable digital formats will reduce information search costs for cross-border investors and will widen the investor base for companies. At the same time, it will contribute to better integration of smaller local capital markets and will support recovery. The information to be covered should reflect the needs of investors and the interests of a broader range of users. Therefore, this should also improve the availability and accessibility of sustainability-related data, steer more investments towards sustainable activities and contribute to meeting the objectives of the European Green Deal.
Action 1: The Commission will propose to set up an EU-wide platform (European single access point) that provides investors with seamless access to financial and sustainability-related company information.
Public listing is too cumbersome and costly, especially for SMEs. Targeted simplification of existing listing rules will reduce compliance costs for SMEs and remove a significant obstacle that holds them back from tapping public markets. High administrative burden, high costs of listing and compliance with listing rules dissuade many companies from accessing public markets. This limits the range of available funding options for companies willing to scale up and grow. This is all the more relevant in a post-crisis context, where in particular smaller companies need to have unimpeded access to equity funding. Building on the measures already taken under the first CMU action plan to further promote SME growth markets, well-calibrated simplification of existing rules will allow for a more proportionate treatment of SMEs without impairing market integrity and investor protection.
Action 2: In order to promote and diversify small and innovative companies’ access to funding, the Commission will seek to simplify the listing rules for public markets.
To complement the action on listing rules, the Commission will continue its work on creating an SME IPO fund to make it easier for small and high-growth companies, in particular in sectors of strategic importance to the EU, to raise capital and finance their growth. The COVID-19 crisis severely altered the EU’s economic landscape and there is therefore a need for renewed ambition to support the financing of smaller companies and innovative scale-ups. This makes the case for the urgent creation of an ambitious SME IPO fund even more compelling.
The Commission will also continue its work on supporting the development of local public markets, notably by looking into how stock market indices can support liquidity in SME equity.
There is a need to further support investment vehicles that channel financing to long-term investment projects. European long-term investment funds (ELTIFs) are specialised vehicles that provide such long-term financing to unlisted companies, listed SMEs, and sustainable energy, transport and social infrastructure projects in order to support green growth. Since only very few of these pan-European funds currently exist, it would be appropriate to review the legislative framework to facilitate their uptake. Changes to the legislative framework and increased incentives to use the ELTIF fund structure could promote the introduction of pan-European long-term investment funds and ultimately channel more funding, including from retail investors, into the EU's real economy.
Action 3: The Commission will review the legislative framework for European long-term investment funds 12 with a view to channelling more long-term financing to companies and infrastructure projects, in particular those contributing to the objective of smart, sustainable and inclusive growth.
The re-equitisation of funding structures should put EU firms on a structurally sound footing and help avoid overreliance on debt, which could cause financing issues for companies in the future. Corporate debt levels were already high before the crisis, and the COVID-19 pandemic caused a considerable loss of revenue and led to further debt accumulation. Therefore, companies need to improve their equity position. Equity is particularly important for fast-growing innovative companies in their early stages and scale-ups willing to compete globally. The role of equity will also have to be stronger to foster the sustainable transition, as projects pursuing sustainable objectives require financing over a long duration. In addition, the debt bias in taxation needs to be addressed to remove undue fiscal incentives for debt financing.
Incentivising institutional investors to make more long-term investments will be instrumental to supporting re-equitisation in the corporate sector. Insurers are among the largest institutional investors. They have, however, been retrenching on long-term assets over the last fifteen years, and the share of their investments in the real economy and infrastructure remains limited. The participation of insurers in long-term investments, in particular equity, can be supported by ensuring that the prudential framework appropriately reflects the long-term nature of the insurance business and mitigates the impact of short-term market turmoil on insurers’ solvency. In addition, the role of banks as institutional investors can be further increased by facilitating their investment and enhancing their ability to build on their large customer bases. Banks and investment firms should be able to invest and 'make markets' (or support liquidity) in company equity, while being subject to adequate prudential treatment.
Action 4: The Commission will seek to remove regulatory obstacles for insurance companies to invest long-term, without harming financial stability and policyholder protection. It will also seek to provide for an appropriate prudential treatment of long-term SME equity investment by banks. Furthermore, it will assess possibilities of promoting market-making activities by banks and other financial firms.
With their wide customer base, banks have the potential to play an even bigger role in providing financing to companies - beyond traditional lending or equity participation. Where banks do not have the capacity or willingness to provide credit, they can instead direct SMEs to alternative providers of funding. Currently, if a bank refuses a loan to an SME, it has to explain the reason for its refusal if that SME requests an explanation. If the bank were to pro-actively refer rejected SMEs to alternative providers of funding, it would allow these companies to save on the costs of searching for alternatives, and raise general awareness about market-based financing. Such referrals could build on the work already conducted under the previous CMU action plan to help banks strengthen the feedback they give when declining SME credit applications.
Action 5: The Commission will assess the merits and feasibility of introducing a requirement for banks to direct SMEs, whose credit application they have turned down, to providers of alternative funding.
Capital markets can also help banks grow their capacity to lend to the economy. Banks can offload some of their loans to institutional investors by turning them into marketable securities. This process - known as securitisation - allows banks to transfer credit risk and free up capital to lend to companies. It is especially relevant in recovery, when banks come under pressure to extend credit to, in particular, SMEs and thus expand their balance sheets. It can also mobilise funding for the green transition through green securitisation. Since securitisation implies the creation of financial instruments that bundle individual assets, it provides investors with significant diversification gains. As overheated and overly complex securitisation markets contributed to the last financial crisis, this activity needs to be adequately regulated. The Commission recently proposed targeted amendments to securitisation rules to enable banks to expand their lending and to free their balance sheets of non-performing exposures. Building on this, further adjustments to rules could make EU securitisation markets more conducive to credit provision, while preserving the EU's financial stability.
Action 6: In order to scale-up the securitisation market in the EU, the Commission will review the current regulatory framework for securitisation to enhance banks' credit provision to EU companies, in particular SMEs. 13
2.Make the EU an even safer place for individuals to save and invest long-term
Europe has one of the highest individual savings rates in the world. However, the level of retail investor participation in capital markets remains very low compared to other economies. This deprives EU companies, and the EU economy in general, of much needed long-term investment. It also fails to serve the interests of people whose savings generate low or even negative real interest rates. The individual investors who nevertheless invest in the EU capital markets should, in many cases, be able to receive higher returns than is currently the case. At present, retail investors do not benefit sufficiently from the investment opportunities offered by capital markets and cannot adequately address their retirement needs.
The legislative framework should underpin a fair investment outcome for retail investors, contribute to building trust and confidence in capital markets and drive their participation. Increased retail investor participation will make it possible to channel long-term savings to companies, improving their access to financing, speeding up economic recovery and the green and digital transition.
The pandemic and ensuing stock market volatility affected individual investors' trust in capital markets, which has an impact on long-term investment. It steered risk-averse households back to bank deposits. At a time when further pressure on public spending weakens the sustainability of statutory pensions, recourse to privately funded retirement pools becomes more important.
There are several reasons for the limited participation of retail investors’ in capital markets. Limited comparability of similar investment products that are regulated by different legislation and are hence subject to different disclosure requirements, prevents individual investors from making informed investment choices. At the same time, the current structure and features of retail distribution systems are often insufficiently competitive and cost-effective.
Financial literacy is an essential skill for making good decisions about personal finances, but many people have not yet mastered it. Sound financial literacy is the foundation of people's ability to make good financial decisions and their financial well-being. People who are financially literate are also more likely to take advantage of possibilities provided by capital markets, including on sustainable investments.
Action 7: The Commission will conduct a feasibility assessment for the development of a European financial competence framework. It will also assess the possibility of introducing a requirement for Member States to promote learning measures supporting financial education, in particular in relation to responsible and long-term investing.
While financial literacy is essential for effective decision-making, retail investors should also be appropriately shielded from the complexities of the financial system. EU rules have already put safeguards to protect investors, including through disclosure of information on financial products. The documents produced under different rules are however often perceived as long, complex, difficult to understand, misleading and inconsistent, therefore not providing retail investors with a good basis for their decisions.
These documents may also result in information overload for sophisticated investors who may not need the same information and safeguards as inexperienced investors. It is unnecessarily burdensome for financial service providers to produce these documents. Furthermore, there are concerns that inducements paid by investment product manufacturers to distributors may create conflicts of interest that negatively affect the quality and objectivity of financial advisors despite the existing safeguards.
Financial advisors play a critical role as gatekeepers to the financial system. However, their level of qualifications, knowledge and skills continues to differ across Member States. In order to reduce the risk of mis-selling, including in relation to sustainability, increase individual investors' confidence in advice and create a level playing field for market operators offering advice in different Member States, certain professional standards for advisors should be set or further improved.
Action 8: The Commission will assess the applicable rules in the area of inducements and disclosure and, where necessary, propose to amend the existing legal framework for retail investors to receive fair advice and clear and comparable product information. It will also propose how to reduce information overload for experienced retail investors, subject to appropriate safeguards. Finally, it will seek to improve the level of professional qualifications for advisors in the EU and assess the feasibility of setting up a pan-EU label for financial advisors.
The EU’s population is ageing. 14 With longer life expectancy, people increasingly need to invest long-term so they get higher sustainable returns and a suitable complementary income for their retirement. By offering consumers a new pan-European option to save for retirement, the pan-European personal pension product (PEPP) is already a major step in that direction. Complementing the existing monitoring tools with more detailed information on occupational pension schemes, pension dashboards will provide Member States with a more comprehensive view of the adequacy of their pension systems, encouraging them to address shortcomings and share best practices. Individual pension tracking systems will provide citizens with an overview of their future retirement income, based on their entitlements in all the pension schemes they participate in or the expected return of long-term products they invest in. People should be encouraged to supplement public pensions with life-long saving and investment, including through more active participation in occupational pension schemes. This will enable them to benefit from more adequate retirement income and make it possible to finance the long-term growth of the real economy, as well as its green and digital transition.
Action 9: The Commission will facilitate the monitoring of pension adequacy in Member States through the development of pension dashboards. It will also develop best practices for the set-up of national tracking systems for individual Europeans. Finally, it will launch a study to analyse auto-enrolment practices and may analyse other practices to stimulate participation in occupational pension schemes, with a view to developing best practices for such systems across Member States.
3.integrating national capital markets into a genuine single market
The scale of Europe’s capital markets does not match the significance of its economy, and there is ample room to increase the euro’s role as an international currency. Moreover, European capital markets remain fragmented along national lines. This locks out actors on smaller local markets from the benefits of integration, notably access to a large investor base. As the benefits of larger-scale markets remain underexploited, EU financial actors are disadvantaged compared to their global peers. The departure of the UK from the EU entails a relocation of parts of the financial industry and leads to a multi-centre financial architecture. Ensuring the optimal flow of information and capital across the EU is therefore essential.
With the measures announced in this section, the Commission aims to tackle key remaining obstacles to market integration. Building on progress made under the previous action plan, these measures seek to address barriers related to legal frameworks or barriers driven by long-established national practices. This is in particular the case in the area of taxation, non-bank insolvency and company law. In these areas, the Commission proposes targeted actions, focusing on the most important barriers that cause market fragmentation and deter cross-border investment.
Taxation can present a serious obstacle to cross-border investment. Yet alleviating the tax associated burden in cross-border investment does not necessarily require harmonisation of tax codes or rates. A significant burden ascribed to taxation is caused by divergent, burdensome, lengthy and fraud-prone refund procedures for tax withheld in cases of cross-border investment. These procedures lead to considerable costs that dissuade cross-border investment where taxes on the return on investment need to be paid both in the Member States of the investment and of the investor, to be reimbursed only afterwards, after a lengthy and costly process. The existing OECD 'treaty relief and compliance enhancement' (TRACE) 15 system and other EU initiatives in this area, such as the code of conduct on withholding tax, already provide orientation on what a mechanism, that would make easier and faster tax refunds possible, could look like.
Action 10: In order to lower costs for cross-border investors and prevent tax fraud, the Commission will propose a common, standardised, EU-wide system for withholding tax relief at source.
The stark divergence between national insolvency regimes is a long-standing structural barrier to cross-border investment. Divergent and sometimes inefficient national regimes make it difficult for cross-border investors to anticipate the length and outcome of value recovery proceedings in cases of bankruptcy, rendering it difficult to adequately price the risks, in particular for debt instruments. Harmonisation of certain targeted areas of national insolvency rules or their convergence could enhance legal certainty. Furthermore, regular monitoring of the efficiency of national insolvency regimes would allow Member States to benchmark their insolvency regimes against those in other Member States and encourage the Member States with underperforming regimes to reform them. The results of the monitoring could also feed into the European Semester process.
Action 11: To make the outcomes of insolvency proceedings more predictable, the Commission will take a legislative or non-legislative initiative for minimum harmonisation or increased convergence in targeted areas of non-bank insolvency law. In addition, together with the European Banking Authority, the Commission will explore possibilities to enhance data reporting in order to allow for a regular assessment of the effectiveness of national loan enforcement regimes.
Europeans, especially young people increasingly want to have a say in how companies are being run, notably as regards sustainability issues. Shareholder engagement must therefore be further facilitated by making voting easier for all investors and corporate actions more efficient, in particular in a cross-border context. Because of differences in national company laws, many cross-border investors – in particular smaller ones – are unable to exercise their voting rights. Managing complex and divergent corporate action processes, for example to organise companies’ general meetings or send information between issuers and investors, is unnecessarily difficult and costly. Targeted legislative changes coupled with the use of new digital technology should improve this situation.
Action 12: To facilitate cross-border investor engagement, the Commission will consider introducing an EU definition of 'shareholder' and further clarifying and harmonising rules governing the interaction between investors, intermediaries and issuers. It will also examine possible national barriers to the use of new digital technologies in this area.
The European post-trade landscape remains fragmented along national lines, impairing cross-border investment. Amendments to the rules under which central securities depositories (CSDs) can provide cross-border settlement services and the functioning of the CSD cross-border passport could contribute to the development of a more integrated post-trading landscape in the EU. The subsequently enhanced competition among providers of settlement services would lower the costs incurred by investors and companies in cross-border transactions and strengthen cross-border investment.
Action 13: The Commission will consider amending rules to improve the cross-border provision of settlement services in the EU.
A true single market cannot exist without a more integrated view of EU trading. A consolidated tape will provide consolidated data on prices and volume of traded securities in the EU, thereby improving overall price transparency across trading venues. It would also improve competition between trading venues. Together with the single entry point for company information (Action 1), it would give investors access to considerably improved information at a pan-European level.
Action 14: The Commission will propose the creation of an effective and comprehensive post-trade consolidated tape for equity and equity-like financial instruments.
Investors’ confidence in the rules protecting their cross-border investments, as well as in the effective enforcement of these rules, is key to encourage them to invest in another Member State. The debate triggered by the termination of the intra-EU Bilateral Investment Treaties 16 has shown the importance of reviewing the system of investment protection and facilitation within the EU. When cross-border investors exercise one of the fundamental freedoms guaranteed by EU law, they benefit from the protection of EU law, including the EU charter of fundamental rights. Improving, modernising and harmonising as much as possible the rules contributing to the protection of cross-border investments is warranted to further encourage cross-border investment within the EU. More consistent protection of investment vis-a-vis State measures will support the free flow of investment across Europe and contribute to financing recovery, in particular in countries that have been most hit by the crisis and where the investment needs are therefore the largest. Improved dispute resolution mechanisms at national and EU level and other measures such as, for example, gathering information on investors’ legal rights, will further facilitate cross-border investment.
Action 15: The Commission will propose to strengthen the investment protection and facilitation framework in the EU.
Truly integrated and convergent supervision is needed to ensure a genuine level-playing field for all market players. It is an essential condition for a well-functioning CMU. This will be particularly relevant in a post-Brexit world with multiple financial centres across the EU. Gradual progress towards more integrated capital markets supervision will be indispensable. In a single market, the impact of a national supervisory failure extends far beyond the borders of a single Member State. National as well as European supervisors need to have the right tools, skills and powers to oversee complex value chains and group structures as well as to investigate possible cases of fraud or abuse, in particular when it comes to publicly listed companies and auditors’ responsibilities. The transition towards more convergent and integrated EU supervision should start by working towards a capital markets’ enhanced single rulebook - a single set of rules applicable directly throughout the EU and then look at ways to ensure that national authorities and ESMA work together to ensure that national supervision also takes into account the European dimension of the market.
Action 16: The Commission will work towards an enhanced single rulebook for capital markets by assessing the need for further harmonisation of EU rules and monitoring progress towards supervisory convergence. It will take stock of what has been achieved in Q4 2021 and consider proposing measures for stronger supervisory coordination or direct supervision by the European Supervisory Authorities.
The Commission will also carefully assess the implications of the Wirecard case for the regulation and supervision of EU capital markets and act to address any shortcomings that are identified in the EU legal framework.
CONCLUSION
Establishing the capital markets union is essential for supporting a resilient and inclusive economic recovery and the green and digital transition. It is a project for the long-term, which requires continuous and determined efforts. Advancing on the CMU requires overcoming obstacles posed by national differences, entrenched habits and legal traditions. The CMU cannot be built in a single stroke. This is why this action plan does not set a single priority, but rather flags a number of urgencies and structural challenges.
The EU has made significant progress in implementing the first CMU action plan: most legislative proposals were agreed, and the non-legislative measures were completed. The benefits of these measures on the ground are not yet fully measurable, but the groundwork has been completed. The measures announced in this action plan will further transform the EU financial system and contribute to addressing the political and economic challenges ahead. Individually, each action represents one more piece of the puzzle: a step forward in areas where progress has been slow or where further work is necessary to achieve CMU. Taken together, they move the EU closer to the CMU vision: a single market for capital across the EU that works for all Europeans, wherever they live and work.
This requires support from the European Parliament and Member States at the highest level and from technical experts in public administration. It also requires that market participants make good use of the measures. The EU can offer tools and put in place supporting conditions, but it is primarily for national authorities to implement them on the ground, and for private actors to take the initiative, seize business opportunities and innovate.
The Commission will start work on the actions announced in this action plan by launching public consultations on the legal framework for European long-term investment funds and non-bank insolvency shortly.
In its future work on the actions, the Commission will act in full compliance with better regulation rules and the simplification objective (the 'one-in-one out' rule), and will keep discussions inclusive, giving sufficient room for all voices to be heard. It also aims to analyse legislative changes not in isolation, but in the context of economic, political and societal needs. Finally, now that the path towards the CMU is firmly established and the impact of the first action plan is expected to show up in data, the Commission will complement its regular reporting of progress on legislative action with monitoring of how EU capital markets are evolving, based on a set of targeted indicators.
(1)
Council Conclusions on the deepening of the Capital Markets Union (5 December 2019) – 14815/19
(2)
European Parliament report on 'Further development of the Capital Markets Union (CMU): improving access to capital market finance, in particular by SMEs, and further enabling retail investor participation', 2020/2036(INI).
(3)
Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions ‘Action Plan on Building a Capital Markets Union’, COM/2015/0468 final.
(4)
Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions ‘The European Green Deal’, COM/2019/640 final.
(5)
Final report of the high-level forum on the Capital Markets Union ‘A new vision for Europe’s capital markets ’ https://ec.europa.eu/info/files/200610-cmu-high-level-forum-final-report_en .
(6)
Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions ‘Europe's moment: Repair and Prepare for the Next Generation’, COM/2020/456/final.
(7)
Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions ‘Stepping up Europe’s 2030 climate ambition’, COM(2020)562 final.
(8)
Communication from the Commission to the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions ‘ Digital Finance Strategy for Europe’, COM(2020)591
(9)
Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions ‘An SME Strategy for a sustainable and digital Europe’, COM(2020)103 final.
(10)
The Commission will adopt a legislative proposal updating VAT rules on financial services in 2021.
(11)
Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions ‘Mid-Term Review of the Capital Markets Union Action Plan’, COM(2017) 292final.
(12)
Regulation on European long-term investment funds (EU) 2015/760.
(13)
In addition to strengthening the securitisation market, the Commission will continue to assess the possibility of introducing a dual-recourse instrument named European Secured Notes. As set out in Directive (EU)2019/2162 of the European Parliament and of the Council of 27 November 2019 on the issue of covered bonds and covered bond public supervision, it will submit a report to the European Parliament and the Council by 8 July 2024.
(14)
See European Commission report on the impact of demographic change, 2020 .
(15)
https://www.oecd.org/ctp/exchange-of-tax-information/aboutthetracegroup.htm
(16)
https://ec.europa.eu/info/publication/200505-bilateral-investment-treaties-agreement_en