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IPE special report May 2018

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Capital Markets Union could trigger relaxation of prudential investment rules

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The European Commission has flagged up national tax regimes and the absence of a cross-border pensions market as two barriers to the creation of the Capital Markets Union (CMU).

Publishing its green paper on the CMU, commissioner for financial stability Jonathan Hill said the ensuing three-month consultation would look at ways of building a single market for capital “from the bottom up” and was a “classic” single market project.

The European executive also highlighted that existing prudential regulation could act as a barrier to attracting long-term financing, especially from institutions regulated by Solvency II – such as pension providers in the Nordic region.

“Capital Markets Union is about unlocking liquidity that is abundant, but currently frozen, and putting it to work in support of Europe’s businesses, and particularly SMEs,” he added.

In its paper, the Commission said a growing occupational and private pension market could assist in a move toward market-based financing, following a marked slowdown in lending by banks in the wake of the financial crisis.

Growing the secuiritisation market and offering investors better access to the credit information of SMEs were two additional reforms viewed as important building blocks of the CMU, first highlighted last year.

On barriers from prudential regulation, the Commission added: “Further work is needed to identify lower-risk infrastructure debt and/or equity investments, with a view to a possible review of prudential rules and the creation of infrastructure sub-classes.”

Addressing IORPs, the paper noted that new rules were being discussed that would help remove existing national barriers preventing pension funds from investing in long-term assets, a likely reference to wording in the revised IORP Directive that overruled national investment restrictions that hindered growth.

This is despite the Commission previously being warned that revisions to the Directive were “at odds” with the creation of the CMU

In line with Hill’s earlier comments that the absence of a Europe-wide personal pensions market was an obstacle to the creation of the CMU, the paper also asked if stakeholders would back the launch of a single, standardised cross-border product.

The European Insurance and Occupational Pensions Authority has been working on details of a potential 29th Regime for personal pensions for a number of years. 

The Commission further signaled its intent to tackle tax rules that would discriminate against cross-border investments in property, saying it would take action “as necessary” where problematic arrangements were identified.

Early reaction from stakeholders was positive, with the UK’s National Association of Pension Funds saying it was important to create an environment “conductive” to long-term investment.

Joanne Segars, the organisation’s chief executive, added: “But it is important to remember that any reforms to the functioning of European capital markets should be seen through the lens of the providers of capital, in particular pension funds.”

The European Fund and Asset Management Association’s (EFAMA) director general Peter De Proft said EU policymakers were right to encourage capital market cohesion as it would “diversify the sources of funding of the economy”.

The Commission’s consultation on the CMU will conclude by mid-May.

For more on the role of sustainable investment within the CMU, see IPE’s past coverage of the topic

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