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The EU Capital Markets Union post Brexit
24 Jul 2017
Significant changes have taken place in the EU since the launch of the European Commission’s capital market union (CMU) in early 2015, with the primary one being the United Kingdom’s departure from the EU.

On the 8th of June 2017, the EU Commission presented its mid-term review of the CMU action plan.  This proved to be an opportunity for the EU Commission to present what has been achieved, but more importantly to deal with the changes that have taken place over the past two years. 

Focussing on the achievements, over 60% of the proposed actions have been implemented in the past 20 months.  The main achievements were a modernised prospectus directive, a proposal for simple, transparent and standardised securitisation, a review of the European venture capital fund regulation, a consumer financial services action plan and the adjustment of capital requirements regulation (CRR) calibration for banks’ infrastructure investments.  These achievements are commendable considering the EU legislative hurdles policy makers need to overcome to pass a number of these initiatives. 

Looking more closely at the changes, the departure of the United Kingdom from the EU Single Market in 2019 will place significant challenges on an EU 27 capital market.   Some critics of the CMU even go as far as to claim that London’s significant contribution towards the EUs’ capital markets activity could throw the EU project off the rails.  It is in this light that the EU is placing increased emphasis on further developing a stronger EU capital market union in its mid-term review. 

Some of the new initiatives being proposed by the EU Commission include: (i) assessing the case for an EU licensing and passporting framework in the fintech space which would allow fintechs attract new clients beyond national boarders, (ii) promoting more proportionate and effective rules for investment firms which would improve investor opportunities and promote better ways of managing risks, and (iii) implementing more proportionate rules on SME listing which would make it cheaper for SMEs to list, thereby increase, the number of IPOs in Europe.  These initiatives are ambitious when one considers the twelve month timeframe.  

Taking into account the Brexit talks which kicked off on the 19th June 2017 one notices a degree of savviness on the part of the EU Commission with proposals designed to start to develop an alternative EU 27 capital market to London.  The strong emphasis on areas in which London is a leader in the capital market space such as institutional investments, fintechs and stock market listings makes this evident.
From a market perspective, for a fully-fledged alternative EU 27 cross border European capital market to work, one needs harmonised insolvency laws and withholding tax across different EU Member States. 

The lack of harmonisation of insolvency regimes across Member States such as different rules for opening insolvency proceedings, the lack of a common definition of insolvency, and the diverse ranking of claims gives rise to a lack of clarity for cross border investors.  With regards to taxation, the lack of harmonisation of withholding tax procedures acts as a deterrent for cross border investors and increases the costs of cross-border trading.

In the area of insolvency, the EU Commission is undertaking a benchmarking exercise of national insolvency regimes to better gauge the discrepancies between national insolvency laws.   In the case of withholding tax procedures, the EU executive has convened an expert group which, following an assessment of existing withholding tax procedures across EU Member States, will deliver a code of conduct by the end of this year. 

The above initiatives are steps in the right direction to further develop a European capital market, however may not prove to be sufficient to counter the challenges posed by a hard Brexit scenario post 2019. 

Since time is of the essence, the EU executive needs to present palatable actions regarding the harmonisation of insolvency frameworks and withholding tax procedures sooner rather than later.  Such proposals could entail harmonising individual elements of national laws by amending existing legislation, or in specific instances through the development of an EU regime. 

Mindful of the technical and political complexities at play, our EU political masters need to be more ambitious when it comes to harmonising the insolvency law and withholding tax procedures if an alternative EU 27 capital market is to reach its full potential in a post Brexit world.
 
Published on The Sunday Times - 23 July 2017 - Download article
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Bank of Valletta p.l.c. is a public limited company regulated by the MFSA and is licensed to carry out the business of banking and investment services in terms of the Banking Act (Cap. 371 of the Laws of Malta) and the Investment Services Act (Cap.370. of the Laws of Malta).