50 / 54
2013 stated that they had lost confidence
in the financial sector as a result of
the financial crisis. This low level
of confidence, the paper says, hinders
the flow of savings into capital
market instruments.
Who’s the boss?
One way to solve this lack of confidence
problem would be to address issues
over supervision. Significant progress
has been made in strengthening the
regulation and supervision of capital
markets across the EU. But, as the
staff paper itself concedes, while
there has been considerable progress
in harmonising rules needed for the
transparency and integrity of securities
markets, legislation relating to investors’
rights in securities is not yet harmonised.
Different member states define securities
in different ways. Some stakeholders
argue that this hampers the integration
of EU capital markets because investors
in one member state cannot correctly
assess the investment risk in another
member state.
This is a point raised by Andrew
Strange, financial services risk and
regulation director at PwC. He says:
“While there is an important role for
the European Supervisory Authorities,
firms will want to consider carefully
which bodies should get responsibility
under CMU. Already we have seen the
Bank of England suggest that this is
not necessary, and we expect regulators
in the UK to oppose ceding additional
powers. Firms across the EU will not
welcome any further uncertainty,
particularly the eurozone banks
that are getting used to the reality
of direct European Banking
Authority supervision.”
The House of Lords EU sub-committee
on economic and financial affairs backs
this view. The committee’s chairman,
Lord Harrison, says: “Of course, we
need to tread carefully. A move to more
diversified sources of funding needs
a market system that better serves
companies at different stages and
different types of investors.
But, perhaps most importantly, it
calls for the creation of an equity culture
in Europe through education and
non-legislative initiatives.
Emphasis on equity
This last conclusion is an area that
needs to be tackled head-on if the CMU
idea is to gain any traction, according
John Grout, ACT’s policy and technical
director. “It is very important to start
to educate the whole of Europe about
equity,” Grout says. “If you are going to
set up a European-wide capital market
for both equity and bonds, you are
starting with a low level of education
in much of Europe. If the Commission
does not come up with soft actions
rather than hard law, it will fail.”
It is one of several points highlighted
in a European Commission staff
document that accompanied the
publication of Lord Hill’s green paper.
The briefing paper recognises that
Europe has traditionally relied more on
bank finance, with European total bank
assets far exceeding those of the US. But
even this hides wide variations between
different countries and their appetite
for equity investment. For example,
domestic stock market capitalisation
exceeded 121% of GDP in the UK,
compared with less than 10% in Latvia,
Cyprus and Lithuania.
Grout warns that expectations must
be realistic, and that change will not
happen overnight, and perhaps not for
many years. “If there is an expectation
that they will get much done in less than
a generation, they will fail. If there is not
a real understanding of what equity is
and what it does, why you might invest
in it and how you might invest in it if
you are a smaller investor, it could take
20 years for people to become used to it.”
The staff paper also notes that more
than 60% of EU citizens surveyed in
INSIGHT
“If you are going to set up a European-wide
capital market for both equity and bonds,
you are starting with a low level of education
in much of Europe”
IAFEI Quarterly | Issue 29 | 48