The crucial role of capital markets has recently figured on top of several high-level reports on Europe’s economic priorities
Creating a European Securities and Exchange Commission (SEC) is now firmly on the cards in Brussels, 10 years after the start of the Single Supervisory Mechanism (SSM) for banking.
Compared to the attractiveness of the US capital market, also for European investors, Europe fails to create the environment to stimulate its own competitiveness and innovation. Europe’s sits on an enormous savings glut, which because of the fragmentation and inefficiency of its financial markets does not find the way for placements at home.
The crucial role of capital markets has recently figured on top of several high-level reports on Europe’s economic priorities. There is no doubt, a more developed and attractive capital market could contribute a lot to the European Union’s competitiveness.
The question however remains how to get there. Its role has been discussed since the start of the euro, 25 years ago, but the EU has still not found the silver bullet, or policy makers and actors do not want to bite the bullet.
How to successfully operate a capital market is what many countries want, but few manage. Unlike the supervision of institutions, where it is a matter of setting capital standards and enforcing it, it is creating the eco-system where expectations of issuers of and investors in securities meet.
This requires the presence of many different actors over different layers in securities markets, in well-regulated financial infrastructures and market intermediaries, as well as in effective self-regulatory organisations and government institutions. The US experienced many booms and busts before enacting federal securities laws in the 1930s, which took another 40 years to become powerful, with the rise of the US securities markets in the 1970s.
The EU has advanced a lot from the time that role of stock markets differed importantly, or when insider trading was not an offence in several of its states. It has enacted many laws, and created the European Supervisory Authorities (ESAs), such as ESMA and EIOPA.
To advance, a combination of strong enforcement of existing and new legislation will be required, mutual recognition ensured, combined with vigilance of competition policy authorities to ensure openness and interoperability, and a much closer cooperation amongst supervisors to ensure same rules apply across borders.
The recent reports of Paschal Donohue for the Eurogroup, and Enrico Letta on the single market, rightly emphasise the crucial role of retail investors, through user friendly, attractive and cost-efficient long-term savings products, and the promotion of a ‘capital markets culture’.
To translate this into reality will be a big challenge, however, especially when one looks at the very limited uptake of the Pan-European Personal Pension Product (PEPP), and the strong headwinds among the member states, and the centre right groups in Parliament, against the EU Commission’s retail investment strategy proposal.
Alongside this, a more integrated supervisory structure, possibly through a form of SSM, should be created to allow for a SEC-like environment where investors are protected on an equal footing all across.
The problem is similar as with the banking crisis: regulatory arbitrage undermines confidence in the single capital market, and open competition is not sufficiently at play among capital market intermediaries.
Thinking ahead, and building upon the current system, ESMA and EIOPA will need to have the structure and capacity to ban mis-selling of investment products, they will need to have the powers to subpoena national regulators. To do this, the governance of ESAs may have to be revised. Or an entirely new structure created.
To be particularly frank, if EU legislation were to have been well enforced at its origin, and this concerns for example the conflict of interest rules as contained in market rules (MiFID I) of 2004, or the interoperability of securities depositories rules (CSDR) of 2014, market integration and consolidation would have happened, and we would not have got the problems we are again discussing today.
Now, we will have to engage even more supervisors, as we also did with the start of the SSM, to tackle the ‘hard fragmentation’. Or new rules will be adopted, which will make the maze even more complex. But a hard design will have to be found to make markets effectively work as one.
Karel Lannoo is chief executive officer of Centre for European Policy Studies (CEPS)
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