There are long-standing and deep-rooted obstacles that stand in the way of cross border, pan-European investment. These range from obstacles which have their origins in national law, including insolvency, collateral, tax and securities law, through to obstacles relating to market infrastructure, such as a lack of access to credit data (particularly for small and medium-sized enterprises, or SMEs) or costs associated with setting up EU-wide investment funds.
The free movement of capital is a long-standing objective of the European Union, yet Europe’s capital markets remain fragmented along national lines. Capital Markets Union (CMU) is intended to reduce or eliminate obstacles to cross-border investment by addressing issues relating to conflicts of law, insolvency and tax.
In 2015, the European Parliament called on the European Commission to analyse in depth, on a country-by-country basis, the current situation in the capital markets, to assess where and to what extent EU-wide impediments to investment via capital markets exist, and how they can be minimised. This was reflected in the Commission’s Action Plan on CMU, and forms the basis of measures to be taken from now into 2019.
CMU initiatives intended to progress the creation of pan-European capital markets include:
- harmonisation of insolvency regimes across the EU;
- a Prospectus Regulation to replace the existing Prospectus Directive regime;
- creation of a harmonised covered bond framework;
- promotion of cross-border investment funds;
- studies on the bond markets and on retail investment;
- studies on the corporate tax base and venture capital tax incentives; and
- legislative proposals relating to cross-border tax changes (to be published in 2018 or 2019).
Respondents to the Commission’s Green Paper on CMU singled out Europe’s disparate insolvency laws as one of the key barriers to assessing credit risk and investing cross-border. Harmonisation of insolvency laws has been on the EU agenda for some time. The Commission’s recommendations of March 2014 on a new European approach to business failure and insolvency invited Member States to put in place effective pre-insolvency procedures to help viable debtors to restructure, and reduce the period of bankruptcy for honest entrepreneurs to no more than three years. In its CMU Action Plan, the Commission noted that the recommendations had only been implemented partially across Member States and noted that differences in national insolvency and restructuring regimes constituted a barrier to the free flow of capital.
On November 22, 2016 the Commission published a draft directive designed to harmonise restructuring frameworks of each Member State. Its aim is to develop and recommend a principles-based early restructuring and second chance legislative initiative by building on national regimes that work well. This follows the conclusion of a consultation in June 2016, where the Commission canvassed stakeholders’ views on common principles and standards for national insolvency frameworks. The draft directive will be discussed and may be amended by the European Parliament and Council. Once finalised, Member States will be required to implement its provisions within two years.
The draft directive does not, however, seek to harmonise core aspects of insolvency law, such as rules on conditions for opening insolvency proceedings, a common definition of insolvency, ranking of claims and avoidance actions – the commentary to the directive notes that such matters are intrinsically connected with other areas of national law such as tax, employment and social security law, and harmonisation would be too far-reaching. Instead, the proposals focus on adapting national insolvency procedures to enable debtors in financial difficulties to restructure their debt before insolvency.
Although the Commission is looking to identify ways to address conflict of law issues, encourage cooperation between national authorities and enhance the efficiency of fragmented national insolvency regimes, the Commission recognises that advocating for changes in national laws in this area will be a longer term challenge since insolvency regimes vary greatly across the EU and are deeply entrenched in national law. For more information please see our related briefing on insolvency law reforms on our CMU site.
Securities regulation and capital market architecture
Currently, European debt and equity capital markets are regulated by a disclosure-based system, where new issuances require a prospectus that complies with the Prospectus Directive (PD) and ongoing disclosure must be made under the Transparency Directive (TD).
The Commission seeks to address concerns that prospectuses are overly long documents that are neither read nor understood by retail investors (which is contrary to the stated aim of investor/consumer protection), and the process of drawing up a prospectus and getting it approved by national regulators is perceived as expensive, complex and time consuming, especially for SMEs. In addition, the requirement to produce a prospectus is triggered at different levels across the EU.
In December 2015, the Commission put forward a new Prospectus Regulation, which is intended to broaden the attractiveness of offering and listing securities across the EU, while maintaining a high degree of investor protection. The proposed Prospectus Regulation is approaching the final stages of the legislative process. On December 20, 2016 the European Parliament, Council and Commission formally came to a political compromise as to what the draft legislation will say.
Once in force, it will replace the existing Prospectus Directive regime completely. This proposal may be one of the first and most significant CMU initiative to see completion. Except for some specific provisions that will apply earlier, it appears that the Prospectus Regulation will apply 24 months from the date of entry into force. That means if the Prospectus Regulation is adopted in the first half of 2017, the bulk of it will apply in the first half of 2019. For more information please see our related briefing on the Prospectus Regulation on our CMU site.
The Commission will also work to tackle uncertainty around securities ownership and treatment of collateral, and pursue improvements in the arrangements for clearing and settlement of cross-border securities transactions. CMU will also involve the promotion of SME Growth Markets, which are being introduced in 2017 under the Markets in Financial Instruments II Directive (MiFID II). These multilateral trading facilities are intended to provide a stepping-stone for start-up companies to prepare for listing on a larger, regulated market. The Commission will review the regulatory barriers to SMEs for their admission to trading on public markets and work closely with the new SME Growth Markets to ensure that the regulatory environment is fit for purpose.