What are EU's plans for creating growth through equity capital financing? An ‘insider’ review of EU’s ambitions for the Capital Markets Union
Ladies and gentlemen
My thanks to the Oslo Stock Exchange for the invitation to come here today
and discuss with you the EU’s plans for creating jobs and growth through increased investment
In particular, capital markets financing needs to play a key role in delivering a more diverse and risk appropriate range of funding options
Needed for our companies to grow and expand
where ever they may be located in Europe.
EU companies have historically been over reliant on bank lending to fund their growth
80% of all their funding coming from bank loans.
The financial crisis was a stark lesson to governments all over Europe about the over dependence on banks
and has led the EU to undergo a rethink on how to redress the balance between debt and equity funding.
The commission under President Junker, a politician with decades of financial services experience as Prime Minister of Luxembourg
Has recognised the role of investment and of developing a broad range of capital market based instruments to fund the EU’s future growth.
The Junker plan consists of a 315 billion euro public private investment fund to kick start investments and improve investor confidence
Whilst his parallel project, he has called the Capital Markets Union
It gives a focus for a plethora of initiatives to transform the financing of EU business by facilitating a move towards an equity culture.
The EU is never short of big projects and slogans.
The slogan on the free movement of capital has been in the EU Treaties since the Treaty of Rome in 1958
The first directive that sought to make this a reality in the equity markets was the Investment Services Directive first proposed in 1993.
We than had MiFID I in 2004
And MiFID II in 2014
Hopefully ready for implementation in 2018
All of these slogans and directives and regulations focussed on removing barriers to the free flow of capital across the EU.
The Giovannini report of 2001 even listed the barriers that needed to be broken down
Some of which have been removed,
Others are proving to be more troublesome
This approach was helpful for those places that already had an existing equity culture
London as a global capital market centre, increased in size
And I hope it will continue to be a natural place for companies to go to raise capital and investors to go to find returns.
But this approach did nothing to create a culture of equity financing in places where one did not previously exist.
A directive being transposed into national law to regulate stock exchanges doesn’t have that effect, if the route to an IPO is never an ambition of fledgling companies and their management.
If the natural way for companies across Europe to access financing is via bank lending
Or if the largest investors in the local stock market are the government as the largest listed entities are still majority state owned companies
The difference with the Capital Markets Union is that it is just as relevant for the least advanced capital markets in Eastern Europe as it is for the most advanced.
It is not about big picture concepts and blue prints
It is not one plan that will solve all of the EU’s financing and saving problems
It is not yet another grand scheme with arbitrary targets that will never be quantified or evaluated.
It is a practical look at what can be done to create that equity culture that Europe so lacks.
This is about encouraging capital markets to grow in places they do not have a naturally assumed function.
The IMF recognised a long time ago that functioning capital markets are a precondition for a thriving modern economy
This is recognised as a key measure in their country specific assessments on an annual basis.
Therefore the tangible way in which the CMU will be encouraged and measured
Is by adding it in as a criterion into the European Semester in an analogous way to the IMF assessment.
This means the European Commission will give practical and tailor made advice and task forces to work with national governments where there isn’t a fundraising capital market
Putting capital markets, including both debt and equity instruments, at the centre of future economic development in Europe.
This approach sets the tone for the methodology of the Capital Markets Union project
It is not a one size fits all approach
What is needed in London, is very different to what is needed in Zagreb
Local investors are often key to early equity investment decisions supporting known companies,
these venues need to be nurtured - but once the companies grow beyond the local funds available and need global investors - a mechanism needs to exist to facilitate broader exposure.
But beyond that
What is needed for a biotech firm to come to market is very different to what is needed for a services based company.
The kind of financing required for a start-up Fintech firm is not the same as for a manufacturing company looking for financing to expand.
The Capital Markets Union stays away from prescribing structures to suit all circumstances
Instead it looks at a dashboard of measures that can suit different companies at different stages of development.
Crowdfunding, business growth funds, and better ways to evaluate SME credit applications are all being explored
As well as looking at a package of measures around venture capital and private equity
Looking in particular at industry solutions
As well as ways to tweak existing legislation to encourage passporting outside of home jurisdictions.
In the equity space there are a number of practical measures that are already being investigated and include:
A revised prospectus directive which has already been released from the European Commission
Across the EU the current Prospectus Directive has many interpretations
I’m not sure if I blame lawyers or national supervisory authorities more
But the Directive and the resulting investor prospectus has become unmanageable and unwieldy.
More a tool for managing and limiting liability
Than for informing investors
If the one off absolute costs for issuing a prospectus are prohibitively high; companies will not publicly list or even look to private investors collectively for funding private placements or corporate bond issuances.
That is why the current commission proposal reduces the threshold below which a prospectus will not be required at all
In the proposal on the table if a company is raising less than 500,000 euros they will not need a prospectus.
Member States will then have the option to go even further with the ability to raise that threshold to 10 million euro should it suit their market and investors.
An increased level of flexibility will be a key defining factor of the CMU
Flexibility encourages diversity
However, exemptions are not always the answer
For smaller companies often it is lack of information and fear of a lack of buyers and sellers during market stress that puts off larger investors
Being exempt from producing a Prospectus would only add to that information black out
Instead the Commission proposal aims at introducing a simpler, cheaper prospectus
It will be a challenge to see whether these simpler documents remain simple once they have been through the legislative process
But it is in the interest of all MEPs and Member States governments to widen access to equity financing for companies.
The proposals aren’t flashy, elaborating or innovative- the emphasis will be to simplify.
The details of the directive include a regime for frequent issuers
to make that more streamlined
halving approval times
reducing burden on supervisors
The proposal which is so obvious I question why it wasn’t done 30 years ago
Is creating one place where all EU prospectuses will be made available.
Instead of the home member state bias that plagues most of us
Global Investors will easily be able to find investment opportunities from outside their traditional markets.
I would see this opening the door to new products and potentially new indices
Why not create a product that focusses in on a range of biotech firms across the EU
Allowing exposure to a particular industry or sector but allowing investors in European technology companies to reduce risk through diversification.
Revisions to a Directive will only have an effect if they are taken on board from the industry side
and by Member State’s governments who are able to redress the debt bias in tax policy and at least level he playing field for equity investments.
This is a defining characteristic of the CMU - a lot of it is not about more regulation
It is about encouraging industry to use the tools available to expand
Encouraging industry to treat the CMU as an opportunity and not a cost.
And about mobilising member states to adopt best practice, especially with regards to taxation policies for investments.
Attitudes are already changing on all sides
New ideas and innovations are being encouraged instead of being blocked
As an example, The UK FCA, with the endorsement of the European Commission, is taking a new approach to emerging financial technologies,
Their new Project Innovate, works to engage with new products and technologies to see how they fit within the regulatory framework
How can the existing regulation accommodate and adapt to new concepts without endangering investor protection?
How can crowd funding and peer to peer platforms ensure that their customers can be properly informed of the risks they are taking while maintaining a model that is attractive to businesses seeking that investment?
New players are emerging that challenge old assumptions
In some cases they are emerging because new regulations are forcing change onto the market
Much as MiFiD 1 saw the development of new alternative trading systems and high frequency trading strategies as well as smart order routers
MiFID 2 is likely to require considerable technology advances in areas like market surveillance, best execution and data interrogation.
As post trade regulations are also harmonised across the EU with the Central Securities Depositories Regulation, and the launch of Target2Securities
The benefits and scalability of new technologies will hopefully reduce costs and increase efficiency for both venues and investors
If concepts like blockchain and decentralised ledgers can be made to work on a wider scale they have the potential to completely revolutionise the post trade industry
But the jury is still out on whether it can be done.
Another aspect of regulation that is driving innovation in an unintended way is the new capital requirements on banks for different activities
Services that used to be provided within a large bank are no longer profitable and so can be done outside, by innovative new providers of new online products and services
Changing the way in which people interact with service providers
Are all taking the place of the traditional bank manager, investment fund manager and pension advisor
These new products will provide a way of interacting with a new category of potential investors
A younger generation that previously would not have looked to invest savings anywhere other than in a bank or a mortgage product.
But this generation doesn’t see national borders within Europe
The Schengen agreement was signed in 1985
The shock and lack of comprehension among many young people at the reintroduction of border controls over the past few weeks is palpable
In a financial services context, they ask why isn’t it possible to have the same bank account in France as in Germany?
If it’s as easy to get a job in Dublin as in Luxembourg then why aren’t pension pots portable?
Instead of seeing the barriers they see the similarities.
The Capital Markets Union is not a check list of measures
It is not a 5 year project that has an end date
It is a fundamental change in the way that investing and financing should take place in Europe
It will require structural change
But more than that
It will require an attitude change
To quote some of Jonathan Hill’s favourite statistics:
“Europe's economy is about the same size as America's,
but our equity markets are less than half their size.
In the US, SMEs get about five times as much funding from the capital markets as they do here.
Compared to the US, EU households have more than double the amount of their savings in deposits,
but only half as much in investment funds and shares.”
That’s the scale of the problem
So I think we all have our work cut out for us in the coming years.
I look forward to working across Europe to find innovative solutions to financing our future jobs and growth strategy.