The work on a stronger and more integrated Capital Markets Union (CMU) in the EU has not progressed as much as many had earlier hoped. There are still substantial barriers hindering the movement of financial services and investments between member states. The barriers arise from only partially justified differences in member states’ national regulation and practices.
In September, the European Commission published its new action plan to diversify and facilitate cross-border activity in the Capital Markets Union (CMU). This has been among the Commission’s objectives for years. The latest action plan sets new priorities and also makes an urgent request for EU member states to provide political support for the project.
There is good reason to develop the CMU. Firstly, there are substantial barriers hindering the movement of investments and financial services between member states. Essential parts of corporate law and insolvency regulation, for example, are subject to national decision-making. The same goes for taxation, which has a strong influence on the movement of capital. These matters cannot be fully harmonised, but even smaller steps will move the European capital markets in the right direction.
Another reason is the need to diversify European companies’ access to funding. At the moment, it is mainly based on banks’ lending. Enabling a wider range of options would further integrate the market and improve companies’ access to funding. The Finnish financial sector supports the work on diversifying funding channels, as this development will ultimately be to the benefit of all financial market players. We stress, however, the importance of safeguarding the major funding channel that banks currently provide to companies and households. This is ever more important in a time of crisis.
Like other European capital cities, Brussels is working hard to rebuild the economy after the damages done by the COVID-19 crisis. However, the Commission has stated that successful economic recovery will need more than the funding provided by the EU recovery package and other public grants. Europe’s capital markets must converge towards the same goal. An additional element of difficulty comes from Brexit, which will take a large, highly developed piece of capital markets away from the EU. The Union must secure the highest possible autonomy, competitiveness and diversity of the capital markets in its region.
Like other EU recovery measures, the projects now being planned must support the Commission’s Green Deal programme and the digital transition of Europe. We highly support these goals.
The Finnish financial sector thinks that work on the Capital Markets Union is of utmost importance and the work must continue. Many of the Commission’s proposals for the diversification of the markets are supportable. At the same time, however, non-regulatory approaches must also be taken into account. Investment decisions or the steering of investment, for example, should not be affected through regulatory means. Banks are in a key role in corporate lending, which is why any regulatory action towards stricter capital requirements must be avoided to avoid weakening banks’ lending capacity. Current regulation must be analysed for obstacles hindering cross-border, optimal functioning of capital markets, and these must be dismantled before issuing any new regulation in the same area. Cross-border activity in capital markets can be promoted by ensuring the uniform and effective implementation and supervision of current regulation in all member states.
The Commission has listed several concrete measures, such as the upcoming legislative proposal on a European Single Access Point, scheduled for set-up in the second half of 2021. The single access point will provide all available financial and sustainability-related company information. We feel this project has high potential to provide consistent information to investors and other stakeholders in the financial market. Due to the urgency of fighting climate change, developing the European ESG data register needs to be prioritised in this context.
To take down obstacles in cross-border activity in European capital markets, the Commission plans to propose harmonisation of the recovery procedure of dividends’ withholding tax at source in late 2022. One of the proposed models for this project is based on the OECD’s TRACE system, which is currently in the implementation process in Finland. It is important to fully streamline the Finnish implementation with the possible EU scheme in the future in order to safeguard smooth single market functioning.
This article was updated on 11 December 2020
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