In March the European Commission adopted its strategy for a savings and investments union (SIU). The SIU aims to channel more of the public’s savings into the bloc’s capital markets. The Commission says the proposals will allow for greater spending on its strategic priorities and make the EU more attractive to investors and companies. 

The SIU proposals are designed to enable companies to draw on funds through the bloc’s capital markets – particularly useful for smaller start-ups, which require more equity financing.

The SIU is the latest step towards creating more integrated EU capital markets. Hoevers, who’s a partner at De Brauw Blackstone Westbroek in Amsterdam, sees integration as an incremental process that could take decades. ‘Maybe it’s a permanent process,’ he says, ‘in which you try to devise a market environment that suits the challenges of today.’

The SIU proposals reflect a feeling in the EU that the traditional role of banks as the main source of money for businesses is no longer sufficient and that alternative sources are required. ‘There’s lots of money available in Europe but [it’s not always] being used to invest in European businesses,’ explains Hoevers.

In some EU Member States, there’s a long history of citizens using banks for their savings rather than investing them in the capital markets, and this mindset could be difficult to change. However, other countries, such as Sweden, have an established track record of retail investment in capital markets and could be a reference point for how the Commission’s proposals might play out in practice. 

Annika Andersson, Vice Chair of the IBA Securities and Capital Markets in M&A Subcommittee, says Sweden has ‘what the Commission is hoping to achieve with a capital markets union.’ However, she highlights that the Swedish market has developed over a long period of time and replicating its success could be a challenge. Success, she says, doesn’t require ‘just one thing, or two things, or three things, that you can implement; they all work together.’

The Commission plans to put forward legislative measures to address fragmentation across European markets, as well as proposals for a more unified and harmonised supervisory framework. Jean-François Adelle, a Member of the IBA Banking & Financial Law Committee Advisory Board, says addressing legal and regulatory fragmentation is one of the driving forces behind proposals for a CMU. According to Hoevers, there are many EU rules that make sense individually, but that are burdensome when put together. He says it’ll be a matter of striking the right balance between having enough rules to maintain order without creating onerous requirements. 

Simon Link, Chair of the IBA Securities and Capital Markets in M&A Subcommittee, says the EU still needs to address the challenge of facilitating access by companies to EU equity capital markets by further cutting arduous administrative procedures, although the Listing Act has helped in this respect. Adelle, who’s a partner at Jeantet in Paris, agrees and believes the EU should adjust its regulatory approach to focus more on ‘strengthening the competitiveness of financial markets and financial institutions.’ He adds that Member States are being encouraged by the European Commission to avoid gold plating – where a jurisdiction goes beyond the minimum level of regulation – when transposing EU directives to ensure a seamless approach to regulation bloc-wide. 

For Link, who’s a partner at Hengeler Mueller in Munich, a successful CMU could mean further ‘aligning the regulatory requirements and investor protection rules, as well as their implementation, so that investors can confidently invest across European markets.’ This would create conditions similar to those of one large market with high levels of liquidity. He believes this approach could also avoid the risk of smaller issuers being lost on a large exchange. There would be ‘the advantage of a large pool,’ he says, ‘while still retaining the advantage [of] smaller markets that are interesting for small issuers.’

However, Andersson, who’s also Head of Capital Markets and Public M&A at Cirio in Stockholm, says small companies could still lose out if there were fewer, larger exchanges in the EU. Such companies usually attract finance from local, smaller investors with a more detailed understanding of the business. Having just one or a few exchanges across the EU wouldn’t necessarily mean European companies will be better able to succeed, she adds.

Andersson’s view is that local markets should be retained and that the SIU proposals don’t provide a clear picture of how the Commission will approach these. For her, one of the reasons the Swedish market has been successful is because it’s a small, well-regulated community with high levels of investor trust – an environment that having one large EU stock exchange would threaten. 

Additionally, says Andersson, the Commission’s plans for more centralised supervision of EU financial markets could pose issues. She says it’s becoming more common for listed companies to be used by organised crime, and it could be more challenging for a centralised supervisory body to monitor such risks, with a knock-on effect for investor trust. 

However, Adelle argues that centralised supervision would be an important component of a successful CMU. ‘The seamless implementation [of a CMU] is, to a large extent, in the hands of a single supervisory [body],’ he says. He adds that the approach to centralised supervision could be similar to that of the European Central Bank, which works with national institutions within EU Member States to implement its directives. 
 

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