Capital Markets Union: A “new, Ambitious” Action Plan – Corporate/Commercial Law


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The European Commission published its “new,
ambitious
” Capital Markets Union Action Plan on 24
September 2020, and emphasised how important a fully integrated
single capital market is to the post-COVID-19 economic recovery,
the green transition and the digital transition.

Click
here
to view this briefing in PDF format.

The European Commission (the Commission) makes
it clear, in its new
Capital Markets Union (CMU) Action Plan
(the Action
Plan
) together with the related
press release
and
Questions and Answers
, that three of its key priorities
are:

  • recovery from the economic crisis triggered by
    the COVID-19 pandemic

  • transition to a digital economy (it also
    published a
    Digital Finance Package
    on 24 September 2020)

  • transition to a green, sustainable economy in
    accordance with the
    European Green Deal

Considerable funding is needed to finance the economic recovery,
tackle the climate and environmental challenges faced by the EU,
meet the targets set out in the
European Green Deal
(and strengthened in the
Climate Target Plan 2030
), support the digitalisation of EU
companies, help SMEs access the funding they need to help them
compete globally, attract investors to European markets, and
support global competitiveness of EU firms. The Commission’s
“new, ambitious Action Plan” for a fully
integrated single market for capital across the EU is its next step
in achieving those goals. Emphasising the importance of
market-based financing (including bonds and private equity),
securitisation and other funding alternatives, it builds on its
2015 Capital Markets Union Action Plan
, its
2017 Mid-Term Review of its Capital Markets Union Action Plan

and the feedback to the
2020 Report of the High-Level Forum on Capital Markets
Union
.

The Commission notes that neither public money nor traditional
bank lending alone can meet the funding requirements necessary to
achieve these goals. While banks are better capitalised now than
they were before the last financial crisis, corporates have higher
levels of debt and innovative companies may not have the necessary
collateral to obtain bank funding. Instead, access to a broader
range of alternative funding options is key.

Gradual Process

The Commission counsels that this is still a gradual process,
and that there is no “one single measure” that
can establish a strong and integrated capital market. Fragmentation
across member states in the areas of supervision, insolvency and
tax remains an issue, but the Commission’s view is that
it is now time to step up the level of
ambition
“.

Brexit

As expected, Brexit is a focus area for the Commission. Noting
that the EU has various financial centres of “varying size
and specialisation
“, the Commission is keen to move
towards an “enhanced single rulebook and effective
supervision…to prevent regulatory arbitrage, forum shopping, and
a race to the supervisory bottom
“.

Snapshot of Targeted Measures

The Action Plan contains sixteen targeted measures. A selection
of those measures is as follows:














Area What does the Commission plan to
do?
Detail
Securitisation Review the current regulatory framework for
securitisations. The goal is to facilitate bank funding of
SMEs.
Little substantive detail was provided on this part
of the proposal, save that it will look at whether the current
framework is able to adequately reflect the risks of different
types of securitisation instrument (including whether the
disclosure requirements are appropriate, how significant risk
transfer is recognised, and the prudential treatment of cash and
synthetic securitisations). It plans to complete this review by Q4
2021.

The recent targeted amendments proposed to the Securitisation
Regulation and the Capital Requirements Regulation
(CRR) were noted – these were designed to
facilitate the use of securitisation as a tool in Europe’s
economic recovery by enabling banks to improve their balance sheets
and expand their lending capabilities, in particular to SMEs. Read
our
recent briefing
for further information on those proposals.

Access to Information Establish an EU-wide platform (European single
access point) to make companies more visible to cross-border
investors.
A legislative proposal is expected in Q3 2021. The
platform will provide corporate, financial and
sustainability-related information.
Listing Rules for SMEs Assess whether the listing rules for SMEs should be
simplified.
It plans to complete this assessment by Q4 2021. As
part of this assessment, it will consider whether the market abuse
regime can also be simplified.
Incentivise use of European long-term
investment funds (ELTIFs)
Review the legal framework for ELTIFs, which
provide long-term financing to sustainable energy, transport and
social infrastructure projects, and to unlisted companies and
SMEs.
It plans to adopt a review proposal by Q3 2021. As
part of that review, it will look at whether current eligible
assets and investments, diversification rules, portfolio
composition and borrowing limits should be updated.
Encourage long-term and equity investment
from institutional investors
Remove regulatory obstacles to insurance companies
investing on a long-term basis, and provide appropriate prudential
treatment for long-term SME equity investment by banks.

Its review of Solvency II (due by Q3 2021) will examine those
regulatory obstacles for insurance companies.


As part of its review of CRR and the Capital Requirements
Directive in Q1 2021, it will apply the flexibility within Basel
III to ensure the appropriate treatment of long-term equity
investments by banks.

Referring declined SME applications to
alternative funders
Examine whether it is feasible to require banks,
when declining an SME credit application, to direct that SME to
alternative funding providers.
It plans to complete this feasibility assessment by
Q4 2021, and assess whether a reciprocal requirement should also be
imposed.
Tax Propose a common, standardised, EU-wide system for
withholding tax relief at source.
A legislative initiative is expected by Q4
2022.
Insolvency Take either a legislative or a non-legislative
measure for minimum harmonisation or increased convergence in
non-bank insolvency law across the EU. The aim is to make
insolvency outcomes more predictable.
A proposal is expected by Q2 2022, with a
consultation beforehand.
Shareholder Engagement Consider introducing an EU definition of
shareholder“.
This will form part of the Commission’s
evaluation of the Shareholder Rights Directive 2
(SRD2), expected in Q3 2023. It will also examine,
by Q4 2021, whether there are national regulatory barriers to the
use of new digital technologies that could make communications
between issuers and shareholders easier. Recent briefings by our
Corporate and M&A Group (
here
) and by our Asset Management and Investment Funds Group
(
here
and
here
) look at SRD2 in more detail.
Cross-Border Settlement Services Consider amending the rules relating to central
securities depositories to improve the cross-border provision of
settlement services in the EU.
This will form part of its review of the Central
Securities Depositories Regulation (CSDR) in Q4
2021. It will also present a report on the CSDR to the European
Parliament and the EU Council in Q4 2021.
Retail investors Examine the rules relating to inducements and
disclosures, look at improving the categorisation of investors
within the MiFID II framework to reduce the administrative burden
on firms, and reduce the information requirements for investors who
are currently classified as retail, but are knowledgeable about
financial markets.
Any proposals to amend MiFID II and other investor
protection legislation are expected in Q4 2021/Q1 2022.
Enhanced Single rulebook Continue to work towards a capital markets’
enhanced single rulebook, noting that this will be particularly
important post-Brexit.
The next review of the Single Rulebook is due by
the end of 2021. As part of that, the Commission will look at
whether any of the European Supervisory Authorities should be given
stronger powers to promote CMU.

Comment

The new Action Plan, and the Commission’s emphasis on the
importance of securitisation and other alternative funding tools,
are extremely positive steps. We will continue to share updates
with our clients as work on the targeted measures progresses.

This article contains a general summary of developments and
is not a complete or definitive statement of the law. Specific
legal advice should be obtained where appropriate.

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