With the intention of kick-starting economic growth and employment, the EU Commission launched its capital markets union programme with the publication on 18 February 2015 of its Capital Markets Union Green Paper. The Commission intends to create a single market for capital by 2019 by removing barriers to cross border investment and creating stronger capital markets. The programme is intended to address the Commission's concerns over a European wide economy that remains heavily reliant on bank funding, by unlocking the financial system and opening up a wider range of funding sources, particularly for smaller companies.
The Green Paper focussed on five main themes:
- relaunching a high quality securitisation market to free up bank balance sheets for lending;
- reviewing the Prospectus Directive to make it easier for companies (especially smaller companies) to raise funds and, in particular, to stimulate cross border funding;
- improving and perhaps standardising credit information for small companies to encourage confidence amongst investors to invest, particularly cross border;
- establishing a European wide private placement market to encourage direct investment into smaller companies; and
- encouraging investment funds to channel funds into infrastructure and other long term investment projects.
The Green Paper noted that the EU's stock market capitalisation by the end of 2013 was 8.4 trillion euros (around 65% of GDP) and, whilst this represented significant growth within the EU compared with previous years, it was still lagging behind the US, whose equity markets were almost twice the size of the EU markets. As a result, the Commission noted that, in the US, medium sized companies receive five times more funding from capital markets than their European counterparts. If the EU venture capital markets were as deep as those in the US, the Commission estimated that as much as 90 billion euros of funds would have been available to finance companies between 2008 and 2013. If a reliable and strong securitisation market were then layered on this landscape, the Commission estimated that this could equate to a further 20 billion euros of additional funding available to companies.
The Commission is therefore seeking to:
- explore methods to lower the barriers for companies to access capital markets, by reviewing the Prospectus Directive and the situations when a prospectus is required and supporting alternative means of financing, such as peer to peer lending and crowdfunding;
- widen the investor base available to small and medium-sized companies, by considering the standardisation of credit assessment information and encouraging retail investment; and
- boost long term investment and develop a European wide debt private placement market as an alternative to the equity capital markets.
To develop further the objectives outlined in the Green Paper, the EU Commission published its Action Plan on Building a Capital Markets Union on 30 September 2015.
The Action Plan clarifies the intention to modernise the Prospectus Directive, commenced by the Commission's consultation paper issued on 18 February 2015. The Action Plan also confirms the intention to refine when prospectus is required, to remove barriers for smaller companies and to streamline disclosure requirements. In addition, it will be looking at methods to stimulate cross border investment.
A proposed plan for revisions to the Prospectus Directive is expected by December 2015. Areas where change may be expected include:
- an increase in current exemption thresholds to enable a larger number of offers to be carried out without a prospectus;
- the level of information required to be disclosed, whether a simplified prospectus should apply for smaller companies and whether a prospectus should have a maximum length requirement; and
- the level of scrutiny and the transparency of the approval process.
The Action Plan also sets out the Commission's intention to promote transparency and integrity for the growing market of "green" corporate bonds whilst also seeking to standardise corporate bond documentation more generally.
In addition, the Action Plan will seek to improve access to the market for retail investors and to explore the development of the, somewhat controversial, European wide personal pension plan.
The Action Plan also envisages that a report on developing innovative forms of finance, such as crowdfunding, will be published in the early part of 2016, with a view to simplifying the opportunities for smaller businesses and start-ups to access finance. The feedback from the consultation for the Green Paper indicated support for the EU to promote crowdfunding, whilst also identifying a number of current regulatory and other barriers to the development of this market. Many respondents were supportive of the EU taking action, particularly with regard to equities-based crowdfunding, from an investor protection perspective.
Currently, securities-based crowdfunding platforms can be authorised under the Markets and Financial Instruments Directive and benefit from a passport to carry out regulated services and activities throughout the EU. This is not the position for peer to peer lending-based crowdfunding platforms, where the EU will need to consider carefully how to balance investor protection with encouraging the continued expansion of this model of finance. For example, it may determine that this can be more successfully achieved through market led initiatives rather than further legislation.
We can therefore expect a number of parallel consultations and proposals to be forthcoming from the Commission over the next 12 months, with regard to the various strands of the Action Plan which the Commission will wish to explore. The Commission has set a timetable for the Capital Markets Union to be implemented and fully functioning by 2019. However, we can expect not all of the current proposals to be implemented by way of EU legislation, as the Commission will also be open to exploring more market or industry led regulation. The effect of the implementation of the Capital Markets Union should, if successfully implemented, result in the simplification of access to funding for a wide range of companies and ultimately the creation of new jobs.
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