Speakers of the session
Philippe de Backer
MEP, Committee on Economic and Monetary Affairs , European Parliament
Benoît de Juvigny
Secretary General, Autorité des Marchés Financiers (AMF)
Director of Markets Policy & International, Financial Conduct Authority (FCA)
Director, Financial Markets, DG for Financial Stability, Financial Services and Capital Markets Union, European Commission
Head of European Equities, Fidelity Investment Management
Chief Executive Officer, Euronext N.V.
Global Head of Regulatory Policy, HSBC Holdings plc
Advisor to the Chairman, Tradition
Objectives of the sessionThis roundtable discussed the main obstacles to equity funding in the EU, whether the on-going actions (CMU, MiFID II…) are likely to foster a development of equity markets in the EU and the additional actions that may be needed. The role that the on-going expansion of fintech solutions and electronic platforms may play in the development of equity markets will also be examined.
Points of discussion
What are the main equity funding gaps and the obstacles to the further development of equity issuance and investment in the EU?
- For which types of enterprises is the equity funding gap most important in the EU (start-ups, larger non-listed companies…) and who are the potential investors for such companies?
- What are the main existing and forthcoming obstacles to the development of equity financing in the EU? What is the importance of regulatory and fiscal obstacles compared to obstacles related to investor or issuer behaviour or to market structure? Is the development of equity financing mainly a problem of investor demand or of the supply of appropriate investment vehicles?
- Could the FTT proposal if it is pursued be a major hurdle to the development of equity markets in the EU and if so for which types of investors or issuers?
Are the on-going actions at the EU level related to the CMU action plan and to MiFID II likely to foster a significant development of equity markets? How to develop a stronger equity culture in Europe?
- What can be expected from the on-going regulatory actions regarding the development of equity financing? Are the longer term actions of the CMU action plan sufficient to fill the equity funding gap and what should be the priorities? Does the review of the prospectus directive appropriately take into account the needs of smaller companies and of retail investors?
- How to encourage a stronger equity culture in Europe and what should be the respective roles of regulators, the financial industry and issuers in this regard? What best practices (e.g. in some Member States) may be built upon?
Can fintech solutions or electronic platforms help to develop equity financing and at what conditions?
- What role can fintech solutions or electronic platforms play and for which types of companies? What benefits can they provide for issuers and investors? To what extent can they help to complete (rather than replace) existing sources of equity?
- Do new fintech solutions require a specific regulatory and supervisory approach at the domestic and EU levels? How can policymakers and supervisors support their development?
Background of the sessionSmaller companies in Europe are very reliant on debt and particularly on the funding provided by banks. There are various reasons for this: they have a close connection with banks regarding their different financial needs, listing processes are costly and complex and many owners are reluctant to share openly information concerning their company. Many larger companies have increased the use of bond financing with the current low interest rates and also because taxation provides an advantage to bond financing over equity since the interests served can be deducted from revenues, which is not the case for equity dividends. A stronger share of equity in their funding would however help non-financial companies to further diversify risks, improve their financial structure and avoid some of the refinancing problems associated with bonds. Moreover equity financing is particularly relevant for innovative companies that have limited cash flows and profitability in the short term and intangible assets. Yet equity funding is decreasing, as is illustrated by the decline in the number of IPOs and firms raising equity.
More investment in equities would also provide investors with further diversification of their investments in a long term perspective. Attracting more retail investors to the equity market however requires developing a stronger “equity culture”, increasing financial literacy and also providing appropriate incentives. Ensuring a sufficient level of liquidity in SME markets is also important for the more experienced investors. (Re)-attracting institutional investors to equity markets is another challenge as many of them have limited their exposure to equities over time due in particular to prudential requirements and accounting rules. At present individuals hold directly on average 17% of their financial savings in shares (both listed and not), but West European insurers for example hold less than 8% of their assets in shares. Many observers moreover emphasize that the Financial Transaction Tax project (FTT) is a potential obstacle to the development of equity markets. Initially designed to curb speculation in the capital markets, the FTT will impact retail and institutional investors also if all or part of the related costs are passed on to them.
The EU Commission has already initiated several actions to foster equity financing with the ELTIF framework aiming at channelling investments notably to unlisted companies, MiFID II growth markets, which will be introduced in 2017 with the objective of lowering the administrative burden for SMEs while maintaining appropriate investor protection and the EuVECA venture capital fund label. A proposal was also made to review the Prospectus directive in order to alleviate the administrative burden for issuers (especially SMEs) and make it a more useful tool for investors. Several proposals in the CMU action plan are designed to further support equity financing: the creation of a VC fund-of-funds supported by the EU budget and the development of an EU framework for crowdfunding for smaller companies; measures to address the current debt-equity bias, the assessment of the prudential treatment of private equity in Solvency II, as well as plans to facilitate cross-border investment.
Market-driven actions are needed in parallel. The need to reactivate the investment ecosystem specialising in SME securities (composed of specialised lawyers, advisors, accountants…) which has sharply decreased over the last 10 or 15 years following the implementation of MiFID is often stressed, as well as the importance of initiatives to create specific SME segments within exchanges with tailored information and administrative requirements, simpler and quicker listing processes. Some actions are also in the remit of Member States such as the implementation of appropriate tax incentives.
Technological innovation could offer further opportunities to facilitate equity issuance and investment. The development of investment-based crowdfunding platforms is a first step, but other fintech concepts or features could also play a role in fostering equity investment (e.g. improved access to online prospectus information, robo-advice…).