Letter from Brussels: Beefing up the CMU

Inadequacy of European national court systems in the financial sphere is due for overhaul. Upgrade is necessary if the EU’s capital markets union programme (CMU) is going to get anywhere, according to a high-status paper. The European Capital Markets Expert Group (ECMEG) states that the quality of the relevant judicial systems across the European countries is “on average, very low”. 

The report, Europe’s Untapped Capital Market, Rethinking Integration points to institutional investors having to face the “uncertainly of enforcement proceedings, which reduce incentives to enter into a contract in the first place”.

The remedy, says author Diego Valiante, the head of financial markets and institutions at the Centre for European Policy Studies, would be a “gradual” introduction of a pan-Europe system of courts. Branches across the EU would handle cases involving tightly specified categories of cross-border financial transactions.

Otherwise, contentious issues concerning financial deals would continue to be heard in local, domestic courts. 

While the court topic gets no mention in Commissioner Jonathan Hill’s CMU Action Plan communication, published in September, it is now receiving attention elsewhere in the Commission. Discussions focus on establishing a permanent International Investment Court to provide investment dispute resolution mechanisms. 

The system would also encompass EU member-state agreements with third countries, and treaties concluded with non-EU countries. The idea is to create “a modern, efficient, transparent and impartial system for international investment dispute resolution”. 

Also, the Transatlantic Trade and Investment Partnership negotiations between the EU and US include discussions on a Tribunal of First Instance (Investment Tribunal). There would be 15 publicly appointed judges, and it would be backed by an Appeal Tribunal. 

The EU court proposal in Valiante’s paper is one of 33 policy recommendations, all to facilitate the CMU. They aim to put flesh on the bones of the Commission plans to remove barriers to cross-border investments. The recommendations range widely and include dealing with price discovery, off-balance sheet items, sanctions, securities law, insolvency, and bank restructuring.

One idea is for a single European business registry. This would disseminate basic information about private corporations. It would replace the 28 national registers. The author says these are often costly to use and opaque in nature. Moreover, they apply different standards and procedures from country to country. 

Another banner the paper takes up is procedures on tax. Tax is described as a significant cost to cross-border trading activities, an estimated €8.4bn per year. 

The recommendation is to develop the existing work of the Commission and the OECD. Policy should focus on adopting systems of relief-at-source, through electronic processing and standardisation of formats, and an agreement between fiscal agencies to share data. 

On accountancy, further work to add to ongoing debates on International Financial Reporting Standard 9 is recommended. The financial instrument is claimed to bring in a logical, single classification and measurement approach for financial assets. Yet it does not escape a scolding. 

The expert group paper writes that internal evaluation methodologies should see further tightening under a comply-or-explain regime when deviating from standard evaluation models.