Feedback statement for the final report of the CMU High-Level-Forum

European Commission, 10.6.2020

European Commission website

Comments

EK remains a strong supporter of the CMU and welcomes warmly the HLF’s new report outlining the next phases of the development of CMU. Deeper and well-integrated capital markets in the EU are needed urgently due the Brexit and COVID crisis as well as to foster long-term economic growth and crisis resilience of Europe.

Market-led better functioning private capital markets are needed also for enabling the transition towards carbon-neutral economy in secured way. Sustainable economic recovery and supporting sustainable growth across the EU should be at the centre when the next steps of CMU are taken.

1 Deeper securities markets

The HLF report rightly emphasises the importance of equity in corporates’ funding mix. Targeted measures to make equity risk-capital and public listings more attractive to businesses, in particular to SMEs, is vital to this aim. Recommendations to enlarge retail investor participation in markets have real potential significantly to grow the pool of investable capital in most Member States.

Only market-led economic recovery and growth can be sustainable. Without well-functioning private securities markets, there will be no proper allocation of assets across the European economy. This must be the foundation of further developing the CMU. There is a threat of state capitalism where Member States support heavily their national champions and more and more funds are allocated through government-controlled initiatives. Distorted competition mechanism combined with raising international trade protectionism forms poisonous cocktail which should be avoided at all costs. With the right execution of the CMU the task might be much easier.

2 Removing barriers and fixing inefficiencies

This area should be a clear priority action in the next phase of the CMU. In order to improve market efficiency and connectivity in EU securities markets EK strongly supports recommendations of the HLF to address fragmentation and inefficiencies in withholding tax collection procedures, insolvency frameworks and divergent legal definitions as these issues stand in the way of cross-border investment, including addressing some of the remaining barriers in post-trade market infrastructures.

To offer one concrete example, we regret to see that recently renewed withholding tax procedure in Finland is directly contravening the standing points and main principles of the Commission’s non-binding Code of Conduct on Withholding Tax. There will be legislative changes related to the OECD TRACE Model (“TRACE”) which Finland is the first country to implement. The TRACE will entail changes to the process by which portfolio investors may claim treaty benefits for dividend paid on Finnish shares held on nominee-registered accounts. This entails some uncertainty and therefore, risks to attractiveness of Finnish stock markets.

3 EK’s priorities for next phase

Out of report’s 17 sets of measures and recommendations the EK prefers the following:

– Reviewing the EU securitisation framework to improve the functioning of this vital mechanism for Europe’s capital markets. Policymakers should prioritise the adjustments recommended by the HLF to ensure that Europe can benefit from well-functioning securitisation markets and the possibilities offered by the “best in class” Simple, Transparent and Standardised (“STS”) securitisation label.

– Measures aiming at fostering the capital markets need cost-effective channels for the issuance, distribution and trading of securities for the benefit of investors and non-financial companies. They need well-calibrated transparency regimes that support liquidity and market confidence.

– As a concluding remark we would like to highlight that the upcoming reviews of key pieces of legislation – MiFID/R, CSDR, Solvency II, the Securitisation Regulation and the bank prudential framework, among others – must be clearly pursued with ambition and focus on the CMU’s aims to expand, integrate and make more efficient the EU’s capital markets.

4 Sustainability, green transition and efficient regulatory framework

The CMU project is profoundly connected to the EU’s ambitions in the areas of Sustainable Finance and transition of the economy towards carbon-neutrality as well as the overall importance of ESG factors in investment activities and wider corporate social responsibility. A flourishing CMU shall not be achieved in a regulatory vacuum.

EK remains a supporter of the EU Taxonomy. EK is thoroughly committed to an ambitious climate policy and supports a firm implementation of the global Paris agreement 1,5 C target. The path towards a carbon-neutral economy in the Nordic region illustrates that high climate ambitions, based on market-based instruments and the right regulatory framework, are crucial components of a modern business policy and economic growth. Carbon-pricing instruments, such as the EU ETS, must remain a key part of EU’s objective of a climate-neutral economy by 2050.

We are grateful that the Commission is consulting the market participants widely via the Consultation of the Renewed Sustainable Finance Strategy which aims to provide the policy tools to ensure the financial system genuinely supports the transition of the industry towards sustainability in a context of recovery.

However, we are concerned that constant regulatory changes or the viable possibility of such changes in the field of company law and company reporting are forming a de facto competitive disadvantage for European companies. In general, there are too much proposals to revisit pieces of legislation that has been in force just very short time. SHRD II and NFRD to name a few. For example, in addition, we have reservations regarding the current regulatory ambitions of the Commission regarding introducing a mandatory (supply chain) due diligence framework for companies.

The ESAs conducted a thorough studies last year and found very little if any evidence on the so called “undue short-termism” in capital market practices. It would help to have a clearer picture about what is our problem in order to assess how to repair it if something is broken. Despite the ESAs consulted market participants widely last year, the consultation on the Renewed Strategy offers very limited if any evidence on the alleged problems regarding company law and capital markets.

Concluding remarks

Companies that orient themselves around a long-term time horizon while also delivering against short-term objectives have been shown to outperform their peers on several key business measures, including revenue, earnings, economic profit, market capitalization and job creation. Corporate purpose is now the focus of a fundamental and heated international academic debate. However, academic debate is normal and much needed. Restless regulatory environment is a disadvantage.

Company law forms a backbone of well-functioning capital markets and competition, and therefore, the market economy itself. The main fundamental legal rules governing how corporates are administered cannot be under constant change.