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Economic and monetary challenges - Editorial - Opening interviews

Building a single market for capital in Europe

By Lord Hill Jonathan - Commissioner, Financial Stability, Financial Services, and Capital Markets Union, European Commission


Is the Capital Markets Union initiative on the right rack? What achievements can be expected by the end of 2016?

My aim was to have a practical bottom-up approach which would deliver some early wins and thus help generate momentum for more reform, so yes I believe we have got off to a good start. We have made a number of proposals to strengthen capital markets and help money flow throughout the EU to where it’s most productive since we published the CMU Action Plan last autumn. There is more to come this year.

We have already acted to support long-term investment by insurers in infrastructure projects by proposing an amendment to European prudential rules. To free up bank lending in the wider economy, we have tabled a proposal to revive securitisation markets. We have proposed an overhaul to the Prospectus regime to make it easier, faster and cheaper for companies that want to tap public markets. For consumer finance services, we have published a green paper with a view to helping people buy financial products that are right for them regardless of where they are in Europe. And we have launched a Call for Evidence on financial services regulation.

We’ve built up a good momentum. This year I want to keep up the pace. So we will propose a package of measures to build up scale, diversity and choice in our venture capital markets to help entrepreneurs. Work will begin to improve the passport system for investment funds so that they can offer their services more easily in different countries, and so that investors have got more information and choice. And we will work to overcome the main difference in our insolvency regimes to give more certainty to cross border investors.

These are just some of the measures that we are taking forward. I hope our proposals can be agreed quickly because they could make a real difference. If we could restart our securitisation market, we could free up 100 billion euros of additional lending. If we could grow equity markets across the EU to bring smaller ones to the European average, 25 billion euros of additional capital could be raised. With our proposals to reform the Prospectus regime, we could save listed companies alone up to 100 million euros a year. All this cannot be done overnight. It is going to require a sustained effort. But with the support that I am receiving from all sides, I sense a great opportunity to make our financial system more diverse and more resilient, and to support investment, growth and jobs in Europe.

What are the key outcomes of the call for evidence in the different financial areas concerned? What are the steps the EU Commission is envisaging?

Our call for evidence on financial services legislation has just ended. It is too early to talk about definitive outcomes, but three themes are emerging. Respondents have said that in places our legislation is not proportionate enough; that it could be limiting financing available to the wider economy; and that the compliance burden is too high.

There is a recurrent concern that our rules could be getting in the way of the diversity of Europe’s financial sector. Respondents call for rules that take greater account of companies’ size, business models and risk profiles. A number argue that the capital requirements are too onerous for smaller banks, but this concern is shared well beyond the banking sector.

Many respondents have raised concerns about declining market liquidity, particularly in corporate bond markets, and question whether regulation has had a hand in this decline. Businesses also complain they are reporting and disclosing the same information in different ways to comply with different pieces of legislation and that the volume of information they are being asked to provide is not always proportionate to risk.

Many other areas have been covered including possible gaps in our legislative framework. We are now considering all the responses and the evidence that support them, and we will come forward with our thinking on how to follow up this summer.

Are on-going technological evolutions in the financial sector and increasing digitalisation an important element of the CMU and how should we best leverage those evolutions?

Digital transformation is in full swing right across the financial sector. Our challenge is to make the most of it to deepen the single market. I see real potential, particularly for consumer financial services.

The challenge cannot be met by regulators alone. Europe’s best financial services companies are already exploiting the new opportunities. Data analytics and machine learning are helping companies offer cheaper and improved services, better tailored to customer needs. Cloud computing is allowing firms to outsource key operations and use newer technology to improve their international payment processes and reduce costs. Technology is also being used to make services more mobile and more immediate. All this is revolutionising the way services are delivered. Businesses have no choice but to adapt. What regulators can do is create the right conditions to help.

This primarily means giving businesses a period of regulatory stability and not choking off exciting new opportunities. We’ve done a lot in recent years to improve our supervisory and regulatory framework, and hardwire consumer protection into our system. Now, businesses need the space to focus on how best to serve their customers.

As I work to build a Capital Markets Union, I see great potential for new technologies to help consumers across Europe shop for the financial product that’s right for them, and for businesses to be able to offer their services to customers wherever they are. Technology should also help financial products to be more portable within the single market, so that when consumers move around Europe, they can take products like bank accounts, pensions, or health and life insurance with them.

Through a consultation on consumer financial services we have asked for views on how we can best exploit digital technology to deepen the single market in this area. We have had a good response, including from FinTech companies. We are now busy completing our analysis and, focusing on practical solutions, we will set out how to follow up this summer.

What are the main issues for single market in the financial area? Is there an increased risk of fragmentation or on the contrary an opportunity to foster further integration?

My focus is to make sure the financial market is able to play its full part in supporting investment, growth and jobs in the wider economy. This is what drives me forward in my work to build a Capital Markets Union (CMU).

The whole point of the CMU is to create bigger markets that could complement banking lending, support growth and strengthen financial stability in Europe. But my motivation is a practical one, not an academic vision for more integration. At its heart is the desire to build up a funding conveyor belt to help companies can access the funding that’s right for them at every stage of development.

At the moment, entrepreneurs in Europe cannot always get the funding they need to get going, particularly if their idea involves higher levels of risk for higher return. Many more established companies cannot get the investment they need to remain competitive. That’s why we’re working on all fronts to free up investment, whether it is bank lending by restarting the securities market, venture capital by amending existing legislation or improving the passporting system for investment funds. These are practical measures designed to channel investment across Europe to where it is most needed. That’s how we can help companies grow and create jobs in Europe. It will continue to be my focus in the months and years ahead.