Efficient supervision of capital markets is a priority of the Capital Markets Union (CMU) given its role in facilitating market integration and European cross-border transactions. But there are currently a number of supervisory barriers halting progress of European mobilisation of capital that now need to be addressed urgently. Following discussions at the CMU’s mid-term conference in April 2017, four approaches stood out as ways to facilitate better access to finance, engagement of retail and institutional investors and cross-cutting challenges in the fields of post-trading infrastructure, sustainable finance, as well as broadening the geographic reach of European capital markets:
Out of the key barriers to a more integrated and fluid capital market in the EU is the lack of trust between national competent authorities and between market players. More integrated supervision can help address this issue which is a structural impediment to cross-border investment and some changes to the governance of ESMA could help ESMA to better perform its tasks. In addition, differentiation may be warranted as regards the role and potential adjustments to the framework in which each ESA operates. The public consultation on the operation of the ESAs which was launched by the Commission in March is the opening step for optimising the role of ESMA in ensuring effective and consistent capital market supervision.
2/ A tailored response
Europe needs capital markets which are available, accessible and affordable. CMU is not about a one size fits all approach: there is a need for targeted responses depending on the market segments and the size and risk profile of market players. The cost of regulation for smaller entities should be taken into consideration. Reducing the regulatory burden on smaller entities in order to allow them to operate is now necessary. The need for a more proportionate approach in regulation is even bigger in smaller markets and local ecosystems.
3/ Focus on post-trading
Post-trading is a key dimension of CMU affecting the whole trading chain. There are outstanding Giovannini barriers, as well as more recent sources of fragmentation in post-trading whereby action is overdue. The potential of distributed ledger technology (DLT) is very high, but too many issues remain today to see it as a panacea to post-trading challenges.
4/ Supervisory convergence
The departure of the UK from the single market reinforces the need to focus on supervisory convergence to eliminate regulatory arbitrage and a race to the bottom. However, some of ESMA’s supervisory tools are too weak to ensure convergence, especially those set out in sectoral legislation. For example, ESMA’s ability to collect information should be improved and the scope of breach of Union law powers clarified. A strategy on data will also be a key element for an improved functioning of the single market for capital.
Despite the increased provision of cross-border services, we have not seen a change in the way supervision is carried out. A more consistent approach to achieving financial stability, investor protection and orderly markets is now needed to help remove the current barriers to investment. If we are not to undermine investors’ interests, exploring ways on how to better perform supervision of cross-border operations is crucial.
Fabrice Demarigny, a Partner and the Global Head of Financial Advisory Services and Capital Markets Activities at Mazars, moderated one of the thematic panels at the public hearing on the “Capital Markets Union (CMU): mid-term review” on April 11 2017, organized by the European Commission. The event was web-streamed and the webstreaming is available here.