Don’t forget the Capital Markets Union

The Lens is pleased to see that the European Commission is still committed to the Capital Markets Union (CMU) – a project that could see institutional investors play a larger role in European corporate finance as the role of banks recedes.

No less than a public meeting was held in Brussels recently, which The Lens attended – as did some of the largest European institutional investment houses and fund associations. The attendee list demonstrated enthusiasm among institutions for the CMU to thrive.

In case you have forgotten, the proposed CMU was unveiled by the European Commission in 2014 when Jonathan Hill was UK’s nominated commissioner in charge of financial services. Its aim is to deepen and integrate the EU’s capital markets and follow the example of the United States. In the US, more than 70% of business finance comes from capital markets and less than 30% comes from bank lending.

In Europe, including the UK, the ratio is almost the exact opposite.

For businesses, the project aims to boost new sources of funding by reducing the cost of raising capital.

But as well as this and offering new avenues for institutional investment, the CMU also aims to boost retail investment by identifying potential barriers that are currently putting European consumers off from saving.

It’s a debate that institutional investors will have to engage with if the proposals are to be successful.

Guillaume Prache, managing director of the pan-European lobby group Better Finance, believes that the institutional sector has crowded out individual investors from equity markets by pushing them into fee-laden and frequently under-performing “packaged” investment products.

In addition, MiFID regulation, the second iteration of which came into force in January, is making securities market much more difficult to access for retail investors, Prache told The Lens.

Many in Brussels feel that the resignation of Hill in the immediate aftermath of the Brexit referendum in 2016 is one of the main reasons for the lack of progress, as the project was widely seen has his brainchild.

Commissioners want retail investors to be able to get on board with European corporate finance – but it is institutions that could really give the project momentum.