LONDON S ROLE IN IMPLEMENTING EUROPEAN CAPITAL MARKETS UNION

Transcription

1 LONDON S ROLE IN IMPLEMENTING EUROPEAN CAPITAL MARKETS UNION Text of Speech by Mark Boleat, Policy Chairman, City of London Corporation, at Conference on Building a Capital Markets Union: Challenges and Opportunities for Business, Vilnius, 15 September 2015 Introduction I would like to thank the Minister for inviting me to speak at today s conference on Capital Markets Union, which has been arranged at the initiative of the Lithuanian Finance Ministry, in conjunction with the City of London Corporation. I must first explain how the City of London Corporation fits into the debate. The Corporation is the elected council for the City of London, also known as the Square Mile, the financial district of London. In fact it is the oldest continuous municipal democracy in the world. Although now representing a modern, dynamic financial centre, it has been in existence for over 800 years. I have been one of its elected Members since 2002 and I have been the Chairman of the Policy & Resources Committee, the nearest we have to a political leader, since The City Corporation works to support and promote UK-based financial and professional services firms, irrespective of ownership. I say specifically UK based as London is home to over 250 foreign banks. We work with the City practitioners and the major financial services trade associations to engage on the regulatory and policy agendas, and also to promote London as the world s leading international financial and business centre. And, relevant to today s conference, we work to promote London as Europe s international financial centre. 1

2 As you would expect, much of this work is undertaken in Brussels, where we have recently increased our presence through the appointment of a former UK Government Minister, Jeremy Browne, to act as the City s Special Representative. We also have a programme of engagement with other Member States, both in London for example through their Embassies but also in their capitals, seeking to identify issues of mutual interest. Given the scale of European regulatory change in the aftermath of the financial crisis, building alliances across the EU has taken on an increasingly important role in recent years. The City welcomes the Commission s focus on jobs and growth. The CMU initiative is an excellent example of the Commission taking a pragmatic approach and encouraging industry to get involved. In particular we recognise the willingness on the part of the Commission to develop this initiative in tandem with the industry, as opposed to previous measures which may have been perceived as being done to the industry. The financial services sector has a crucial role to deliver growth across the EU, linking corporates with investors, unlocking investment for companies, and ensuring that savers can invest for their future prosperity. We believe a primary aim of the Capital Markets Union should be to improve the availability of capital market funding for medium-sized firms. This can be achieved both by easing access to finance and by increasing the pool of capital. A second aim of CMU should be to improve the range of market-based products for consumers. To achieve this we need to remove both internal and external barriers to investment, and to improve the competitiveness of the European financial services industry. Yes, CMU presents a significant opportunity for the UK. More than half of all capital markets activity in the EU is through the UK. However I agree with Commissioner Hill, who has responsibility for Financial Stability, Financial Services and CMU, who has 2

3 stressed its importance for the EU28 and not just those with well-developed capital markets. He believes that a CMU will in fact be of greater benefit to investors and business in countries which do not have well established financial centres, because a CMU should create conditions for capital to cross borders, to flow to entrepreneurs with high growth potential, wherever they are located in the EU. CMU will help expand financial centres across the EU, not just the City of London. Our recently published research from PwC on the Future of the European financial services estimated that in 2014, financial services generated 731 billion of output across the EU and 6.4 million jobs. CMU is an opportunity to share best practice across Member States. It s good news that the Commission has indicated that bottom-up, industry led approaches and sharing national best practices will be at the core of this initiative. While it is important to deliver results by 2019, we must also lay the groundwork for more ambitious reforms, to create a truly Single Market for Capital in Europe in the medium-term. There are separate priorities for the short, medium and long-term. Short-term priorities The short-term priorities for the EU in this area are already generally accepted. The first one is to revive the securitisation markets in Europe. Securitisation is critical to the success of non-bank alternative finance, mainly by freeing up the banks balance sheets. The efforts of the ECB, the Bank of England and others to revive securitisation markets are very welcome. The second short-term priority is to develop a European private placement regime. 3

4 Private placement markets are already well developed in France, Germany, and the USA. These markets are also attracting foreign companies in significant numbers. This shows that there is strong international demand for this type of financing. The project led by the International Capital Markets Association on standardisation of private placement documentation is a valuable initiative to develop a Pan European Private Placement market. Another good initiative is the UK s recent move to introduce a new exemption from withholding tax for private placements. In response, six major institutional investors committed to invest around 9 billion ( 13 billion) in private placements and other direct lending to UK companies over the next five years. Other Member States could consider their own exemptions and the Commission could usefully establish and share best practice. The third short-term priority is the review of the Prospectus Directive. This is good news and should reduce the burden on smaller firms looking to list. The final short-term priority is to review the cumulative impact of financial services regulation. A vast amount of new regulation was introduced following the financial crisis. This was necessary but the speed with which it had to be done inevitably meant that it was not joined-up. It is important that a thorough ex-post impact assessment takes place to identify issues and unintended consequences with regulations and how they link together. This is the only way we ensure that the right balance between stability and growth is achieved. The regulatory regime should support growth and not stifle it. PwC concluded that a more pro-growth regulatory regime would create an additional 850 billion in EU economic output by 2030 and almost 11 million extra jobs across the EU economy. 4

5 Medium-term priorities Let me now turn to the medium-term priorities. Building a CMU requires more than tweaking of the regulatory regime. It needs a fundamental change in culture. Corporates Multinational and blue chip companies already access the capital markets. Therefore the focus has rightly been on SMEs, but the term SMEs is too broad for a tailored policy response. Access to the capital markets is likely to remain the preserve of middle market companies and high-growth SMEs. But by increasing the access of these companies will indirectly help smaller SMEs by freeing up banks balance sheets. Another key challenge is the lack of standardised credit information for SMEs. In a research project by TheCityUK and EY, corporates across Europe highlighted disclosure obligations as a burden and significant cost to business. This was particularly evident where no central credit registry existed. A number of Member States have set up central credit registers in order to share credit data. This could be replicated in other Member States. Whilst progress on a proposed FTT has fortunately slowed, although I understand that there are new attempts to make progress, I would just say if it was to be implemented, it would make alternative sources of financing less attractive than bank lending, which will be outside of the scope of the tax. A measure that would only be adopted by 11 of the 28 Member States would increase the fragmentation of Europe s capital markets and discourage capital flows across borders. A key barrier to further growth of European companies is their appetite to take risk. The ability to manage risk is fundamental to companies, including when raising capital. 5

6 Access to liquid and efficient derivatives markets ensure that companies can manage their risks efficiently. It can broaden the financing options for companies, by allowing them to raise funds in other markets and lower the cost of raising capital. Therefore, maintaining the exemption in EMIR and the CVA (Credit Valuation Adjustment) exemption in CRD4 for non-financial corporates is essential to ensure that corporates are not priced out of the market. This issue needs to be re-examined by Basel to ensure a level playing field globally. Investors The majority of retail savers access the financial markets through collective schemes such as UCITS, pension funds and life insurance. Promoting the role of institutional investors will be key to increasing market-based financing. The success of the UCITS framework shows that it is possible to design a competitive product, with high levels of consumer protection, that can attract substantial capital both from within the EU and globally. Recent moves to create similar products such as the European Long Term Investment Funds and European Venture Capital Funds need to be promoted. We also need to examine the legal impediments. In the UK, direct lending by institutional investors is possible without a banking licence. This has enabled new markets to develop, such as peer-to-peer lending. However, in many European countries originating a loan requires a banking licence, which prevents institutional investors from lending. Building a CMU will require re-thinking the role of financial intermediaries and business models. Regulatory reform for the past twenty years has aimed to improve the efficiency of trading across Europe. 6

7 But, inefficiencies in the system remain and further work to standardize processes should be a priority, both for the industry and policymakers. In the last century the Commission created a group of experts known as the Giovannini Group which identified fifteen barriers to efficient cross-border clearing and settlement of securities in the EU. Many of these barriers relating to clearing and settlement have yet to be addressed. This is particularly true in the area of Central Securities Depositories (CSDs) which remain largely national in nature in the EU. Greater cross-border consolidation of CSDs in Europe would help to achieve economies of scale and reduce costs and risks for investors. In order to achieve the goal of a Capital Markets Union, it is also essential to rethink the distribution model. For many retail investors and SMEs, their local high street banks remain their one-stopshop for financial services. Perhaps there is a need to re-think the role that banks play in acting as a hub for savers to access a wider range of savings products, and for companies to access a broader range of financing solutions? There is also anecdotal evidence that it is difficult for institutional investors to market their products cross-border due to the high cost of distribution. Access to advice for consumers is another limiting factor in incentivising consumers to invest their money outside the banking sector. Recent measures in legislation have tried to limit commissions and inducements but consumers are reluctant to pay for advice. Legislation therefore needs to balance the benefits of providing advice to consumers with potential conflicts of interest. CMU has to be able to deliver for these consumers and savers, not just SMEs. Let me say a few words about the role of technology. Technological advances have 7

8 enabled new ways to bring savers and companies together. The rapid growth that we have seen in the FinTech sector in the UK over the last few years is astonishing. The very fact that there are more people employed in London s FinTech sector than either New York or Silicon Valley, over 44,000 people, says it all and shows just how we have a real competitive edge in Europe as a world leading hub. Innovation has always been at the heart of the UK economy and financial services in particular. Our biggest financial services companies now recognise that their next big, bright ideas may not simply come from their own in-house strategy teams and IT departments, but actually from the thriving start-ups that are pushing the boundaries and thinking creatively. And crucially in the UK, what they have is access to people that have these bright ideas the coders, the graduates and entrepreneurs up and down the country. The developments that we re seeing with alternative finance, crowd-funding platforms and peer-to-peer lending have had an extraordinary impact so much so that the sector was valued at 20 billion last year. In a global economy that really means we stand out. We want that growth to continue and most importantly help create further jobs across the UK and the EU. The final medium-term priority is access to global markets. While reducing intra-eu fragmentation is important, reducing global fragmentation of capital markets will be just as important. We believe that the EU should play a leading role in international discussions to promote cross-border coordination of regulation and supervision. However, this should start at home by a wholesale review of the existing third country access rules and equivalence regimes. 8

9 Longer term priorities Finally let s consider the longer-term priorities for a successful CMU. The first longterm priority is the debt-equity bias: Europe needs more risk capital. There are many reasons why corporates rely on debt, including greater understanding and access to bank loans, however, the unfavourable tax treatment of equity compared with debt is also a motivating factor. The current bias in tax treatment between debt and equity needs to be re-examined in order to promote the greater use of equity by companies. The second priority is incentivising households to save for the long-term. While the overall amount of savings in the EU and the US is comparable, a major difference is the proportion of these savings held in banks versus investments. Incentivising households and retail investors to save for the long-term through institutional investors is key. Creating the right products to meet savers needs, as well as putting in place accessibility and the right incentives, will be crucial. Incentives need to target the strong liquidity preference and risk aversion displayed by retail investors. EU Referendum Before I conclude I feel I ought to say a few words about the City s view on the forthcoming Referendum on EU membership. In a 2013 survey of leaders of financial services firms by TheCityUK, 84% wanted the UK to remain a member of the EU. 95% said that access to the Single Market is important for the UK s future competitiveness. More generally, the clear message we have had from City business is: 1. Britain needs to be in the Single Market and to influence the rules made for the Single Market: In practice this means being a member of the EU. The Swiss and Norwegian options are unattractive. 9

10 2. Britain needs to be better engaged in the EU in order to secure the right policy outcomes, whilst recognising that on financial services issues, Britain has generally been very successful in doing so over the last 20 years. 3. There is no appetite for repatriation of powers in respect of financial services; on the contrary there is a wish to widen and deepen the Single Market in financial services, but this will require additional EU legislation to remove barriers in some areas and we must be honest about that. In short the financial services sector wishes the UK to remain in a reformed EU and has put forward a range of proposals to help take this debate forward. Conclusion And so to conclude, let me stress once again that we very much welcome the EU s ambition to create a European Capital Markets Union. We also need to be realistic about what can be achieved. A certain amount of fragmentation will always persist given the very nature of the European Union with 28 Member States and 23 official languages. A Capital Markets Union can facilitate growth, but will have a limited effect, given the current extraordinary monetary conditions, without fixing the macroeconomic situation in many European countries. Nevertheless, I firmly believe that Europe focusing on jobs and growth, and working towards a CMU, will enhance the stability and prosperity of its economy. With the most developed capital markets in Europe, the UK has a key role to play in building a CMU and must be a positive and active supporter with our European partners. 10