In preparation for its upcoming mid-term review this summer, the Commission started its public consultation on the Capital Markets Union on 20 January. This article outlines what has been achieved to date and the steps that now lie ahead.

Consultation on the Capital Markets Union

The objective of the current consultation is to gain market feedback about the reform measures and to gather new proposals so that current political, economic and technological developments can be taken into account. Questions are being asked regarding six policy areas:

The questions are less concerned with current regulatory activities or specific measures and more orientated towards additional measures which appear to be sensible from the point of view of the respondents. The Commission wishes to gather details about the advantages that the participants expect from the proposed measures and also about challenges that may arise when implementing them. Market participants can submit their opinions using the online form until 17 March. The answers provided will be reflected in the Commission's interim report. The consultation process thus offers market participants the opportunity to have a direct impact on the next phase of the Capital Markets Union.

First milestones

In April 2016, a Delegated Regulation on Solvency II – the European supervisory regime for insurers – entered into force, affecting the information obligations (Day 1 reporting) for undertakings¹. The Delegated Regulation was the first Capital Markets Union measure to be implemented with the goal of promoting infrastructure investments.

This milestone was referred to in the Commission's first status report in April 2016. The report also deals with current and long-term legislative initiatives, for example, those relating to business restructuring and insolvency.

In September 2016, the Commission published a further status report. This outlined the level of progress in implementing the Capital Markets Union and urged that swift progress be made in priority areas – a matter which Commission President Jean-Claude Juncker further emphasised in his State of the Union address. This is also required for achieving the goals of the EU's Investment Plan, i.e. generating jobs and growth.

Supporting fintech companies

The Commission's second status report also addresses the increasing spread of financial technologies and the question of how to deal with innovative companies that capitalise on them (fintech companies). In the report, the Commission announced that it would draw up a coordinated strategic concept to support the development of fintech companies while also bearing in mind the relevant regulatory framework and aspects of investor protection.

It has since formed a working group tasked with finding such a balance between innovation, investor protection and compliance with regulations.

Retail investors

In the report, the Commission also identifies the development of private pension arrangements and of financial services for retail investors as further areas of importance. Due in particular to the persistently low interest rates, improving returns from retail investors' savings is an important issue.

According to the Commission, one possibility here is to bring more deposit account savings into the European capital markets. This may seem like a paradigm shift, especially to many Germans, usually rather risk-averse retail investors who traditionally invest less in capital markets. By contrast, countries like the UK and Luxembourg exhibit a higher level of capital markets penetration. This is also true when it comes to the role played by capital markets in the financing of enterprises. Here there is substantial variation between EU member states in the proportion of financing obtained from banks and that obtained from capital markets. The fragmentation of the European capital market was ultimately one of the main reasons that the Capital Markets Union was called for in order to create a genuine internal capital market for the entire EU.

New prospectus regime

One of the action plan's important initiatives is the revision of the Prospectus Directive. Goals here include making access to the capital markets easier and cheaper, especially for small and medium-sized enterprises, and making the prospectus regime more efficient overall. At the same time, investor protection is also to be bolstered by improving the way in which information is presented in prospectuses.

To this end, the Commission submitted a proposal and the relevant annexes on 30 November 2015 with the intention of replacing the Prospectus Directive with a Regulation. Working on this basis, the European Parliament, Council and Commission agreed in principle on a new regime for securities prospectuses at the end of 2016. However the legislative process has not yet been completed.

Central elements of the new Regulation include adjusting various limits and exemption provisions, additional alleviated disclosure requirements and provisions to make the descriptions of risk factors and the prospectus summary easier to understand.

Prospectus requirement

It is planned to raise the twelve-month limit below which there is no prospectus requirement for offers to the public from €100,000 to €1 million. At national level, member states will also be able to exempt offers of up to €8 million within the same period from the prospectus requirement. Contrary to the Commission's proposal, offers of securities with a denomination of €100,000 or above will also remain exempt from the prospectus requirement. This will now by supplemented by alleviated rules for prospectuses for bonds which, regardless of any minimum denomination, will be permitted in a segment of the organised market that is open exclusively to qualified investors.

Outside the organised market, small and medium-sized enterprises with a market capitalisation of less than €500 million which are seeking access to an SME growth market as well as unlisted companies with less than 500 employees will be able to draw up an "EU growth prospectus". In addition to considerably reduced content requirements, this type of prospectus will have a standardised form to make producing them easier. Secondary issuances from issuers already listed on an organised market or SME growth market and therefore subject to follow-up transparency requirements will also benefit from the simplified prospectus requirements.

Prospectus summary

In order to better inform investors, the prospectus summary will be limited to a maximum of seven standard A4 pages and it should be generally easier to understand. In the summary, information from a key information document produced in accordance with the PRIIPs Regulation may², where such a document is necessary, take the place of information on the securities. The description of the risks is to be limited to the specific risks essential for making an investment decision.

For frequent issuers that produce the prospectus as a multi-part document on the basis of a "universal registration document" submitted in advance to the relevant supervisory authority, there will be a new regime with reduced checking periods. With this new format, an issuer can simultaneously fulfil both the prospectus requirements and the obligation to publish an annual report in accordance with the Transparency Directive.

Ultimately, the Commission wants to improve investors' access to securities prospectuses by means of a new Europe-wide online database. The European Securities and Markets Authority (ESMA ) will run the database and make all prospectuses approved by the European supervisory authorities accessible for free.

Framework for securitisations

The Commission has also taken on the task of reviving the securitisation market, which ground to a halt during the financial crisis. This resulted in severe losses in the EU, although there were much fewer instances of default than in the USA³.

Revitalising the securitisation market is intended to free up banking capital and improve financing for small and medium-sized enterprises as well as infrastructure projects while also broadening the investor base. The measures are intended to stimulate new investment with the Commission estimating that the economy could be boosted by €100 billion. At the same time – by applying experience gained from the financial crisis – stability is to be increased.

Initial legislative measures include the upcoming cross-sector Securitisation Directive, which is to apply to all securitisations. It will contain due diligence rules for investors, transparency rules and retention requirements applicable to originators, sponsors and original lenders. It will also define criteria for simple, transparent and standardised (STS) securitisations and outline a specific supervisory architecture for securitisations. According to the Commission's proposal, ESMA is to maintain a publicly accessible list identifying the securitisations that fulfil the STS criteria.

On 19 December, the European Parliament discussed a draft version of the Directive in its first reading. An important aspect of the planned Directive is that it tightens requirements for risk retention. It also differentiates between simple, transparent and standardised products and financial instruments which are complex, non-transparent and risky. In addition, it is planned to adjust the Capital Requirements Regulation (CRR) in order to make the capital market requirements for the banks' securitisation positions more sensitive to risk.

Consultation on covered bonds

At the end of 2015, public consultation on the topic of covered bonds also took place. Particularly in Germany, bonds issued by mortgage banks (Pfandbriefe) play a pivotal role in long-term financing, for example, in the property and public sectors. Thanks to their secure structure, German Pfandbriefe are held in high regard both in Germany and abroad. In many European countries, similar regimes have been developed for their respective markets. Nevertheless, the European market for Pfandbriefe and other covered bonds is still highly fragmented. This is due to the specific characteristics that they have at national level.

The goal of the consultation was to develop a European framework with high standards in order to bolster the market internationally without interfering with tried-and-tested practices at national level. The Commission now intends to resolve these areas of tension with consideration given to the answers gathered in the consultation. In December 2016, the European Banking Authority (EBA) presented a comprehensive report on this subject in which it proposed a three-stage plan for harmonised regulation of covered bonds in the EU. The Commission is expected to decide the degree to which these recommendations will be reflected in new regulatory measures by the middle of the year.

Sustainable financing

In addition to legislative reform projects in various areas of banking, insurance and securities supervision, the Commission was responsible for setting up a new expert group in December. The group is made up of 20 experts from the financial sector, academia and civil society. It is tasked with drawing up recommendations for a comprehensive EU strategy for sustainable financing by the end of the year. These recommendations are not only to be used in the Capital Markets Union but also as a component in follow-up measures for the EU's 2030 Agenda for Sustainable Development.

The expert group is chaired by Christian Thimann from Germany, member of the Executive Committee of the French insurer AXA. He has substantial experience in both the public and private sector. This includes his work as an advisor to the President of the European Central Bank and as Vice Chair of the Financial Stability Board's (FSB) Task Force on Climate-related Financial Disclosures.

Sustainability has been gaining greater importance within the European legal system. This means aiming to achieve sustainable financing that is environmentally and climate-friendly, for example, by means of new initiatives in member states or at EU level. The objective here is for both public and private capital flows to fuel sustainable investments to the greatest degree possible.

Second half until 2019

The half-time whistle is expected to blow in June 2017. The European Commission will then present its review detailing almost two years of the Capital Markets Union.

The second half of the Capital Markets Union is scheduled to end by 2019. With elections for the European Parliament and the appointment of a new Commission due that year, it is planned to have the foundations for a "well functioning, integrated Capital Markets Union" already laid by then. Some measures, such as the harmonisation of insolvency law, are nonetheless highly complex and the EU may still be dealing with them for some time to come.

Footnotes: