10 Jun 2015

Capital Markets Union: From policy to implementation

Simon Lewis, AFME's Chief Executive, comments on the European Commission's Capital Markets Union.

AFME strongly supports the European Commission’s capital markets union (CMU) initiative. A capital markets union is vital in securing the main aims of the new Commission: creating jobs and restarting growth and investment, as well as to improve the functioning of the European financial sector.

The banking system and the capital markets are the twin engines which finance the European economy. An important lesson is that before the crisis the EU economy was too reliant on its banking system and we have continued to pay the price through a slow recovery and continued falls in lending.

Today, many businesses – particularly smaller and midcap companies – lack suitable funding options to support their growth – particularly risk capital and committed long-term funding. The CMU initiative should address this funding challenge by providing firms with a greater range of financing tools and ensuring access to a wider and deeper pool of potential investors. In our response to the Commission's CMU consultation, we have emphasised some important themes for the Commission to address:

  • First – there needs to be a focus on equity markets and on building an equity culture;
  • Second – we agree with other industry partners on the key concept of the ‘funding escalator’: providing the right tools to fund companies at different stages of growth;
  • Third – we need efficient and liquid secondary markets. We must preserve the essential function of market-making;
  • Fourth – the international dimension – CMU should make capital market flows easier both into and out of Europe;
  • Fifth – the CMU project needs to be a demonstration of better regulation in action.
  • Finally, an overarching point: CMU needs to be ambitious. It needs to be a transformative project and it needs to be coherent. We think it makes sense to set the goals for CMU early in the process, rather than having to retrofit them further down the line.

In order to deliver the growth and jobs that Europe needs, we have to move from policy to practical implementation. Many market participants, including AFME, have also put forward practical proposals that can be implemented and help build a capital markets union. Examples of the initiatives are:

  •  the work done by the Pan-European Private Placement Working Group, led by ICMA and which is a cross-industry group that has developed a guide and standard documentation for an EU-wide private placement regime;    
  • the work of the joint working group with banks, infrastructure investors and law firms that has produced a detailed guide for issuers and investors on how to use capital markets sources in order to finance infrastructure projects. This guide will be published shortly;    
  • a practical guide, which AFME is about to publish, for distribution to European SMEs on sources of bank and non-bank finance.

These work-streams are first steps that the industry is taking in turning recommendations into practical changes which will have a real and beneficial impact on providers and users of funding in Europe. Turning to the Commission's agenda, we welcome the early priorities which have been outlined for CMU. Taking these priorities forward will need a partnership between industry and policymakers at EU and national level. But besides new initiatives, the Commission should also consider the impact of legislative proposals that are already in the pipeline on the development of CMU – in terms of funding costs, the level of investment, or the impact on market liquidity.

The potential benefits of a capital markets union to Europe’s firms and investors are huge. Growth cannot be taken for granted and new jobs and start-ups are not guaranteed. The right financial environment is vital. So now is the time to develop an ambitious vision and a stretching set of goals for CMU.