When the European Commission’s Green Paper on Capital Markets Union was published earlier this year, plenty of people applauded its moderate stance. No grand gestures were proposed; it created no hostages to fortune and, especially, no new European institutions.
For capital markets participants, the paper's low-key proposals seemed a blessed relief. Coping with the EBA, ESMA, EIOPA and the ECB, as well as national regulators, feels like quite enough. Few, if any, capital markets bankers would say the solution to their problems is another European rule making body.
Instead, the goals of Capital Markets Union are better legislation. Reviews have been commissioned on the Prospectus Directive and securitization. Once they have gone through, expect more studies on private placements, SME credit, venture capital, equity listings, fund passporting and a host of other topics.
Following these reviews, expect revised regulatory regimes to encourage growth and cross-border investment, coordinated by a commission that wants to make its mark now that nearly all the crisis-era regulation has hit the statute book.
European commissioner Franz Timmermans is in charge of the campaign for better regulation, which some hope could lead to the demise of the worse ideas emanating from Europe in recent years. So far, no legislation has been stopped (even the widely despised proposal for bank structural reform), let alone scrapped, but the intention is nice.
So, we have a joined up programme of sensible, modest changes to existing regulation, nudging the rules governing Europe’s capital markets in a more growth friendly direction. What’s not to like?
The problem is that the plan might not work, or that it will need constant testing through the courts to bring Europe’s diverse and headstrong member states into line.
Without executive power, such as that provided by a single Capital Markets Union body, specific changes are hard to push through, whatever the rules.
Say a fund wishes to market itself in a jurisdiction outside its own. It can be passported into the jurisdiction, but that doesn’t iron out every wrinkle. A fund that can be advertised on a taxi in London might be banned from TV in the Netherlands, confined to bank branches in Slovenia or offered only by regulated brokers in France. Funds raised may be subject to different tax regimes and different reporting requirements.
Even with a piece of legislation saying, in effect, that any fund can be offered anywhere in Europe (UCITs does this well, but other buy side regulations have a way to go), an investment manager might have to fight hard to make that a reality.
Local regulators with their own hobby horses, approval regimes and powers will not readily give them up, and legislation is, by its nature, a passive instrument.
A single fund manager will never go to court over the minutiae of approvals or reporting in each jurisdiction. They will either tolerate it or simply not engage in certain cross-border business.
So to make Capital Markets Union work, there must be an organisation with the capability and appetite to animate the legislation and to challenge any obstacles in its way.
Given the antipathy to creating another European body, and the dangers in that course, this initiative should come from the market.
Much as the American Civil Liberties Union seeks out test cases and funds legal challenges to preserve aspects of civil liberties, Europe’s capital markets community should club together to make sure CMU has teeth. Once the CMU legislation is on the statute book, it will need vigilance to keep it running smoothly — the market is where that attention should come from.
It will be in the whole industry’s interests for CMU to be a success. Don’t let it fail for want of taking responsibility.