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Financing of the EU economy - Is the CMU on the right track?

CMU next steps – The cracking of the tough nuts

By Cole-Fontayn Michael - Chairman, EMEA, BNY Mellon

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The Capital Markets Union project has already had one major success.

The CMU project has attracted much interest from regulators and from the financial industry globally. And it has also – and over the longer term probably much more importantly – attracted very significant interest from the world of academia and of think tanks.

Over the past few recent months, several important studies have been published that highlight the enormous potential major benefits of a CMU, and that analyze the critical steps that need to be taken to realize this potential.

One of the most interesting aspects of these studies is the amount of attention that they pay to some forbidding subjects.

We are being told that work in areas such as accounting standards, insolvency procedures, securities law, and withholding tax procedures, is a necessary pre-condition for a successful Capital Markets Union.

The analysis is convincing. Despite the apparent successes of the last 15 years, and several high-profile pieces of European legislation, such as MiFID, EMIR and the UCITS Directive, capital markets in Europe still show relatively low levels of integration, and do not function as an effective risk-sharing mechanism, as they do, for example, in the United States.

The conclusion is inescapable. There is an urgent need for more work on the core building blocks of financial markets, including their legal foundations, the availability and reliability of information, and sound and effective tax processes.

In the past, there has often been considerable scepticism as to the chances of success in these areas. Accounting standards, insolvency and securities law, and withholding tax procedures are notoriously tough nuts to crack.

Observers have often pointed out, for example, that reforming insolvency or securities law is a highly complex and difficult undertaking with knock-on effects in many areas of national law; and that member states have an interest in keeping inefficient withholding tax procedures, as they benefit both from a free float of as yet unreclaimed withholding tax, and from extra revenue as some categories of investor are unable to the reclaim the tax.

There is an urgent need for more work on the core building blocks of financial markets.

There is, however, good news.

First of all, the European Commission’s CMU Action Plan that was published on 30 September 2015 states that the Commission is planning work in all of these areas (even though some of the details are as yet unclear).

Secondly, we have seen in the effervescence of documentation that the CMU project has provoked important papers from industry members, associations and other bodies, that provide relevant and helpful suggestions.

One notable paper is the report published by AFME on 22 February 2016, and entitled “Potential economic gains from reforming insolvency law in Europe”. The paper quantifies some highly impressive economic benefits such as an increase in GDP for some countries by 2%; it also sets out a practical list of measures that could be included in a narrow and focused Directive.

Another example is the set of clear and pragmatic suggestions on securities law that the Association of Global Custodians has given in its response to the European Commission’s Call for Evidence on the EU Regulatory Framework.

In a major report that was published on 3 February 2016, and that has the evocative title of “Europe’s Untapped Capital Market”, the Centre for European Policy Studies (CEPS) has set out 33 policy recommendations that cover a wide range of areas including insolvency and securities law, and withholding tax, and that also focus on accounting standards.

The conclusions are very clear. The nuts may indeed be tough. But they need to be cracked if we are to make significant progress towards a Capital Markets Union, and if we are to achieve the important social and economic benefits of a CMU.

The success of the CMU project in inspiring global interest and debate has given us a set of practical proposals of how to start cracking.