1. Ensure a level playing-field between markets and between EU and non-eu actors

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1 EBF_ The European Banking Federation is the voice of the European banking sector, uniting 32 national banking associations in Europe that together represent some 4,500 banks - large and small, wholesale and retail, local and international - employing about 2.5 million people. EBF members represent banks that make available loans to the European economy in excess of 20 trillion and that securely handle more than 300 million payment transactions per day. Launched in 1960, the EBF is committed to creating a single market for financial services in the European Union and to supporting policies that foster economic growth. Website: 13 May 2015 EBF response to the Commission s Green Paper on the Capital Markets Union The European Banking Federation (EBF) welcomes the opportunity to comment the Commission s Green Paper on the Capital Markets Union. European banks believe that the new Commission should focus on growth and jobs. Further progress towards more integrated European capital markets can be an important factor that brings Europe back to a sustainable growth path. Europe needs efficient and dynamic capital markets alongside a strong and stable banking sector. This makes sense from both a growth and financial stability perspective. Stronger capital markets can potentially unlock more investments for companies. Key points 1. Ensure a level playing-field between markets and between EU and non-eu actors The Commission must ensure a level-playing field for all actors in financial markets. To ensure an effective Single Market it is necessary to align regulation to ensure that it does not act to impede cross-border activity or to distort competition. Channels of funding complementary to bank intermediation will be essential to create a CMU, however these channels must be appropriately regulated. The so-called Shadow Banking activities should not benefit from less onerous or even preferential regulatory treatment, but should be subject to the principle of same risks, same rules. 2. A tailored approach is needed Proportionality must be a key principle of the Commission in developing the CMU. A one-sizefits-all approach will not take into account the different risks of distinct activities and business models within EU capital markets. The Commission must take into account the diverse cultural, economic and legal frameworks in EU jurisdictions, and disproportionate measures could lead to serious unintended consequences and further fragmentation of capital markets. Particular consideration should be given to preserve innovation and the ability of the financial services sector to provide consumers with products tailored to their specific needs. The EBF sees initiatives of product standardisation under the so called single market for retail financial European Banking Federation aisbl 56 Avenue des Arts, B-1000 Brussels Phone: Website: - EU Transparency register ID number Page 1 of 42

2 services as unnecessary and undesirable. Market solutions geared towards member states particularities and consumers specific needs should prevail over one-size-fits-all legislative initiatives. Specifically, the bond market borrowers require solutions tailored to their particular situation and needs to finance their projects. The EBF urges the Commission to consider the drawback of forcing a high degree of standardisation or harmonisation as they may overlook issuers specific funding needs 3. A systematic and detailed review of the financial markets regulatory framework and the completion of the Single rulebook First of all, a systematic and detailed review of the financial markets regulatory framework, across all different regulations and regulatory authorities should be carried out. This review, while taking into consideration the various objectives of the existing regulations, should aim at identifying instances of regulatory duplication, gaps, and conflicts. A successful approach to regulation of a capital markets union has to focus on streamlining legislative initiatives, ensuring a higher degree of harmonisation between the different national legal and regulatory frameworks and in managing substantial risks rather than trying to eliminate risk altogether. Member States must avoid gold-plating legislation, which interfers with the single market. Member States should not be competing on legislation, but creating an environment propitious for growth and investment. The starting point for the CMU is good as the EU has already created a Single Rulebook covering the essential areas of capital markets. Newly created rules on trading and investment services, asset management, OTC-derivatives and clearing as well as on central securities depositaries provide a robust framework. Now is the time to complete the Single Rulebook. This would help to remove uncertainty for investing in capital markets. The Single Rulebook must be complemented by close convergence of supervisory practices that must be effectively and consistently enforced across all Member States. This will help to create a Single Market for capital for all 28 Member States and would help to remove barriers to cross-border investment within the EU. 4. The CMU should promote market-led standards and best practices During recent years the EU has heavily relied on hard-law instruments and notably on directly applicable regulations. In the CMU project the Commission should explore full potential of market-led standardisation and best practices. The EBF notes that some local markets have taken market-led initiatives to improve market documentation (such as standard terms for noninvestment grade corporate bonds) and standardisation in order to attract more international investors. Local initiatives and EU-level harmonisation should be seen as complementary. In this respect EU Policy-makers need to avoid introduction of too intrusive measures that could have a negative impact on capital flows and investment. For instance emerging SME-bond Page 2 of 42

3 markets need flexibility and further EU-level regulatory action in this field is likely to be counterproductive. In general, where market-led initiatives are able to overcome or mitigate the limitations visible in the EU capital markets, these must be strongly promoted. Market-led initiatives are able to take into account the different risks, activities and business models within EU capital markets. Conversely, legislative measures must be regarded as a second best solution, because they can lead to serious unintended consequences and further fragmentation of capital markets. Some of the problems and flaws identified in the green paper are in part consequences of the changes in regulatory requirements, particularly in what regards limits to risk exposure, liquidity thresholds and risks borne by the final customer. 5. The CMU should emphasise the importance of liquidity and market-making The success of the initiative to make capital markets more efficient will also depend on whether or not markets can be made broader and deeper and on the availability of the necessary liquidity. Market-makers and intermediaries serve a crucial role in financial markets by providing liquidity to facilitate market efficiency and functioning or ensuring that both sides of the financing market are able to meet. Market-makers are critical for the financing of the economy, as was recently confirmed by the ECB. 1 The Commission needs to place market-making and the importance of providing liquidity at the forefront of the CMU. Liquid capital markets will boost the process of moving capital from slowly growing sectors to dynamic innovative industries and raising investors confidence. The adoption of the Banking Structural Reform proposal would have a significantly adverse impact on the potential CMU. The separation of trading activities out of the universal bank would render market-making more expensive for customers and decrease liquidity in markets. In this respect, it is also by taking into account the important role of intermediaries that the CMU may become a success, connecting borrowers and companies with lenders or investors. In addition, it is critical to create carefully balanced rules on equity, and non-equity transparency in MiFID II and MiFIR. One of the most important conditions for development of the European bond market is proper calibration of pre- and post-trade transparency rules. Excessive transparency requirements could have severe unintended consequences as market makers would be deterred from providing liquidity. Finally, hurdles and disincentives to providing liquidity and market-making may also arise from the planned introduction of a Financial Transaction Tax (FTT) in 11 Member States. By increasing the cost of secondary market trading - even fractionally - in participating Member States, the FTT would reduce liquidity and so make capital markets a less attractive place for EU and non-eu investors. This, in turn, would impact both primary and secondary capital markets and demotivate exchange trading and clearing. The tax s negative consequences 1 See p5 of the Opinion of the European Central Bank of 19 November 2014 on a proposal for a regulation of the European Parliament and of the Council on structural measures improving the resilience of EU credit institutions (CON/2014/83) [Link]. Page 3 of 42

4 would be proportionate to its huge effective magnitude, taking into account the cascading effect in its application. 6. Revised rules for Securitisation The Commission needs to revitalise the market for simple, standard and transparent securitisations. This initiative must not discriminate products especially if suitable for SMEs (as for example synthetic securitisation). This should be based on a dedicated European securitisation framework addressing the inherent risks associated with securitisations, including a revision of the capital requirements for securitisations. The EBF further believes that the current BCBS framework must be revisited as it has been built on capital charges based on US structured finance loans. This means that today, the capital charge associated with securitisation is based on data not representing the EU market. We would recommend reconsidering this approach. We would also encourage the Commission to view securitisation as a tool to free up bank balance sheets, making it easier for companies especially SMEs to obtain, indirectly, financing from the capital markets. 7. Review of the Prospectus Directive The Prospectus Directive needs to be reviewed to make it easier to comply with. A revised Prospectus Directive should make it easier and cheaper for firms to access the market, while still preserving a high level of investor protection. Disclosure requirements for companies, which are seeking access to, or are already trading on, an EU regulated market must be at the same level. Overall, we support the review of the Prospectus Directive as it can be a burdensome framework repeatedly amended and adjusted over the last years. We would therefore support a review of the whole disclosure regime (prospectus directive, market abuse directive/regulation, transparency directive, etc.). The EBF supports the Commission s initiative to ease the current prospectus requirements and would highlight the need for high quality information. This need for data in a prospectus is even more important when dealing with SMEs and unregulated markets as the data may not be otherwise available to investors. Hence, we would encourage the Commission to take a stance of improving the quality and type of information in the prospectus. 8. Removal of existing tax barriers The first Giovannini Report of November 2001 identified 15 barriers associated with the clearing and settlement of cross-border securities transactions within the EU. Two of them (barriers 11 and 12) are tax barriers. The complexity and cost of obtaining the tax relief to which an investor is legally entitled often leads investors to forego the relief. Even though the financial intermediary has access to Page 4 of 42

5 accurate customer information and is subject to high compliance regulation standards, obtaining tax relief to which its customers are entitled is often not practicable. Full withholding at the maximum tax rate is often the outcome and constitutes a major disincentive to crossborder investment in capital markets. National provisions requiring that taxes on securities transactions must be collected via particular local settlement systems may narrow the choice available to investors and impair cross-border activity. In this respect, the prospect of introducing a Financial Transaction Tax (FTT) at EU level or in a limited number of EU Member States (through the enhanced cooperation procedure) is a major threat for the CMU (as indicated under bullet point 5). 9. Cross-border shareholder tax transparency The issuer s ability to identify shareholders, no matter where they are located in the EU, is crucial in an increasingly cross-border environment. And while there are efficient models for identifying domestic shareholders tax obligations at national level, this is not so at EU level. Increased harmonisation of procedures and formats for the exchange of information and harmonisation of national regulatory requirements would help to promote cross-border shareholder tax transparency further. In most EU countries there are efficient models for identifying domestic shareholders. However, there is no common European model for enabling issuers to identify their owners in a cross-border environment. 10. Improvement of financial education and knowledge The Commission should support steps to improve the level of financial education in the EU, for both retail investors and SMEs. This would help investors to understand more clearly the functioning of capital markets and their role within markets, while SMEs would benefit from increased knowledge of possible funding options available within capital markets. Page 5 of 42

6 EBF position / response 1) Beyond the five priority areas identified for short-term action, what other areas should be prioritised? Restoring confidence in the capital markets Rebuilding trust in the single currency project is paramount to the Capital Markets Union project. The focus should be on mitigating lack of confidence and simultaneously changing the climate of risk aversion, (central factors common to agents in the financial system and to mechanisms and channels for financing the economy). A fundamental component of the Capital Markets Union needs to be the policies which reduce market asymmetries, namely risk mitigating measures to redirect risk appetite beyond high grade investments (e.g. companies with innovative technologies with high potential for rapid and sustainable growth). These policies would be aimed at peripheral countries and at a price consistent with their economies growth capacity. Better regulation in financial services The EBF welcomes the introduction of the new post of First Vice-President in charge of Better Regulation. The Capital Markets Union project should be based on robust principles of better enhanced regulation and we deem it appropriate to identify the improved regulation agenda as both a shorter and longer-term action. We also note that the Commission s REFITprogramme (the Commission s Regulatory Fitness and Performance programme) is an important exercise to reduce excessive administrative burden. This programme should be extended to financial services. Creation of streamlined regulatory reporting channels Recent regulatory agenda has had a constant focus on improved data and close-to-real-time reporting. This has meant several new reporting obligations towards the ECB, the national central banks, the European Supervisory Authorities (ESAs), the local regulators and trade repositories as data intermediaries in exceptional cases. Depending on the scope of these rules (such as CRR, EMIR, proposal for SFTR, ECB regulations) same data needs to be reported to several recipients with slightly different intervals and parameters. In general, high quality data is crucial to ensuring that emerging risks can be tackled as early as possible without creating systemic risk. Consistent, high quality reports are also crucial for investors when they make their investment decisions. The current system with growing and overlapping reporting obligations creates additional burdens for, and possible barriers to, capital flows. A one-stop shop approach towards at least all EU-level and national supervisors, as well as ECB, would be beneficial. Different report addressees should agree on similar data fields and the use of same standards as much as possible. Reporting channels should make use of existing IT systems and well-improved digital Page 6 of 42

7 means. The ESAs could, within their mandates, play a stronger coordinating role to avoid such unwanted consequences, to the benefit of the CMU project. Creation of a single generic EU-recognition scheme for assessing EU equivalence of third countries Some financial centres are and will be a regular customer of the ESAs when assessing EU equivalence of third countries. In the foreseeable future the ESAs could assess EU equivalence of financial legislation with more than a dozen planned and/or effective EU directives. It is in the interest of both the EU and major third countries that equivalence between a considerable number of relevant EU and foreign legislative initiatives be achieved reliably and within a reasonable period of time. This would enhance legal certainty, reliability, and trustworthiness for all involved commercial parties with cross border businesses. In turn this would build an indispensable condition for capital markets to attract capital and investments more easily into the EU area. As an immediate action a re-designed, well-structured outcome-based framework could help streamlining the complex and recurrent processes of assessing equivalence. Such a new process is already enshrined in the context of a number of existing directives and regulations but should be taken up consistently. In fact, we believe that such a predetermined structure, together with stipulated core principles for material requirements would greatly facilitate the demanding tasks of the ESAs. In particular, it would enable the ESAs to conclude their assessments in a timely, transparent and resource-efficient way, without sacrificing thoroughness or eliminating the Commission s prerogative to decree conclusively. For a third country, on the other hand, such a generic process would ensure that the contentrelated requirements are more transparent and reliable (entitlement) and the process itself more readily assessable (legal certainty). Such a general process could be easily and rapidly built (low hanging fruit) taking into account existing experience and regarding principles of mutual regulatory recognition. Likewise, an outcome-based, rather than a line-by-line approach (aimed at evaluating whether the third country regime achieves the same regulatory objectives as the corresponding piece of EU legislation for files like EMIR, AIFMD or MiFID2/R), consulting with the third country and its regulator prior and throughout the equivalence assessment process would contribute significantly to an efficient equivalence assessment. In the EU, the introduction of principlebased references to international standards (e.g. reference to IOSCO principles in the equivalence requirements of MIFIR, CSDR and drafts for a Benchmark Regulation) are valid examples indicating such a move towards a more practical, principle-based approach. Consider adjusting the current client classification in MiFID II / MiFIR Under MiFID II all kinds of private investors are classified as retail clients, independent of their investable assets base, their risk appetite and their diversification need (including Page 7 of 42

8 geographically). These provisions (MiFID Annex II) have been adopted with the aim of securing maximum certainty for all private clients. Yet, practical experience shows in our view that whenever entirely different sorts of clients and client needs are subsumed undifferentiated this easily leads to inappropriate regulation for all parties and with undesirable consequences and barriers for capital markets: smaller retail clients need more accessible investment information and have enhanced consumer protection requirements while largely experienced wealthier retail clients with suitable assets, requiring diversification and with interests in capital markets investments (including across borders) and corresponding risk appetite, may demand more complex products. The current MiFID II categorisation of customers, coupled with the distinction between complex and non-complex financial instruments restricts all retail clients from investing in certain securitised and structured products. This can limit the investment opportunities of wealthier private customers. The existing customer classification should therefore be amended by splitting retail clients into two distinct categories: a) ordinary retail clients; and b) highly sophisticated, often high net worth individual clients (or group of individual clients). This highly sophisticated, high net worth individual clients should be defined as private clients disposing of a considerable amount of investable assets of at least 2 to 3 million euros (excluding owner-occupied real estate and pension). Individual clients should be treated as professional investors and thus be allowed to invest as well into riskier and more complex products. Consequently, third country firms should be allowed to deal with such investors on a cross-border basis as stipulated in the Articles 46 and 47 of MiFIR for professional clients. This relief could also contribute to achieve the declared goal of widening the investor base for SMEs within the EU, as thereby assets under management with banks in a third country would become more readily available for investments in the EU (see also response to question 22). 2) What further steps around the availability and standardisation of SME credit information could support a deeper market in SME and start-up finance and a wider investor base? The European Banking Federation supports the aim of the European Commission of improving the availability and standardisation of SME data. Notwithstanding, the EBF considers that any initiative undertaken in this context must take into account the following aspects: a) Ensure customer data security and client confidentiality Any proposal aiming at improving credit data availability must have robust measures to ensure customer data security and legitimate client confidentiality. As best practice evolves, the Commission should review whether amendments are required to the EU Data Protection legislation. All best practices, ranging from centralised i.e. credit registers in various variations to decentralised e.g. Standard Business Reporting, must comply with the principles of integrity and responsibility. The borrowing company must remain in control of the dissemination of its Page 8 of 42

9 own information. The confidentiality of the data forwarded to regulated users must remain protected by professional confidentiality. In the event that this confidentiality is jeopardised by obligations to disseminate or share this information, the latter s quality and comprehensiveness will be affected, putting at risk the ultimate objective of this measure. b) Any initiative should aim at providing information at a reasonable cost Achieving the single market will ultimately require the definition of a minimum core of accounting data, which are comparable and accessible at a reasonable cost. This is a very sensitive issue as it is not clear where the information should come from. On the one hand, if SMEs themselves are to produce this data, it may represent a significant cost to many of them. On the other hand, financial institutions cannot be asked to act as a data warehouse for their customers. Moreover, financial institutions would find it difficult to provide information on their customers without violating their customers privacy or confidentiality requirements. Importantly, it should not be mandatory for an SME to provide information and only those wishing to access capital markets (and therefore are of sufficient scale) should share information to reach more investors. c) It is extremely important to avoid red tape as it puts off the majority of companies Best practices are evolving and differ from each other. Especially in the case of decentralised initiatives for gathering and exchanging information from SMEs, excessive regulation should be avoided. In addition, the harmonisation of local legislation on data protection has to be taken into account as sometimes it is difficult to distinguish between SMEs and household figures. d) Equity research promotion instead of limitation The EBF recommends actions specifically designed to increase the quality and quantity of independent financial analysis on listed SMEs. In this regard, MiFID 2 provisions on investment research should be taken into account. Such provisions may be counterproductive because financial research will be regarded as non-monetary benefits and thus will be limited. As a result, the level of information on SMEs will likely decrease and the investment, rendered less attractive. The feasibility of disclosing standardised financial ratios throughout Europe, including a definition of median ratios for each business sector, for instance, could also be considered as an interesting benchmark for investors. 3) What support can be given to ELTIFs to encourage their take up? ELTIF funds have raised some concerns due to the way they have been designed. The outcome of the ELTIF negotiation was not optimal. Although the EBF acknowledges that the time horizon of ELTIF is not synchronised with most retail investors time horizon, there is need to provide more flexibility in order to boost this form of investment. Page 9 of 42

10 ELTIFs should be opened to pension and investment funds. Retail investors would have access to this type of instruments via pension or investment funds. So, savings would enter capital markets via ELTIFs for pension funds. To encourage the institutional investors to invest further in these instruments we suggest: a preferential capital treatment for exposures to the ELTIFs, for instance, reducing the capital load or reviewing stable funding liquidity requirements of such asset classes; the creation of fiscal incentives for ELTIF s; fiscal incentives are crucial for the success of ELTIFs, namely to attract retail investment; investors are only willing to immobilise their investment for a long period of time if they expect that they will have major returns or tax incentives that compensate for such a restriction. 4) Is any action by the EU needed to support the development of private placement markets other than supporting market-led efforts to agree common standards? Some Member States have had a strong market for private placements for many years. Standards have long since emerged, even if such standards have not been published in text form. Private placement investors are mainly institutional investors and banks with local business areas which use this as a means of diversifying their regional risks. The existing standards are geared primarily to their needs and also reflect national legislation (especially insolvency, collateral, company and tax law, but obviously also investors supervisory law). Thus, standardisation at EU level would not represent an added value per se. However the reasons why certain Member States have not yet seen the emergence of a private placement market is something that should be closely examined on a case-by-case basis. Reasons may include: a lack of investors, the availability of alternative sources of funding, or little interest by borrowers. The EBF does not believe the absence of a European standard to be the reason. In addition, private placements suppose a certain minimum placement size that may admittedly be adjusted downwards in line with market maturity. However, they cannot be seen as substitute for small-sized bank loans. Ultimately, private placements are generally not the most attractive type of corporate finance; their interest rates are usually higher than those for bank loans. For certain companies, they may still make sense for strategic reasons (i.e. diversification of funding, preparation for using regulated capital markets). The standardised documentation developed as an industry initiative and referred to on page 11 of the green paper has only been available since the beginning of It has been used in only very few issuances to date and is extremely extensive (around 100 pages). This makes placements more expensive. What is more, the documentation fails to provide legal certainty, an issue of capital importance to investors. The EBF would therefore urge the Commission to refrain from giving this market standard preferential treatment or promoting EU-wide standardisation. Increasing transaction costs by introducing additional transparency Page 10 of 42

11 requirements or by extending the scope of the market initiative would make it more difficult for SMEs to access this funding tool. We believe this point needs to be taken into account and careful consideration required before drafting regulatory reform on a segment which already functions efficiently, especially in the area of SME/corporate funding. 5) What further measures could help to increase access to funding and channelling of funds to those who need them? a) Focus on equity Smaller sized companies often lack a sufficient capital base in Europe. The results of various empirical studies point us towards Capital Markets Union. It is commonly agreed that financial systems based on equity rather than debt financing are more stable. A deleverage process through an increase in equity would contribute to decreasing companies risk, what would grant them access to finance in better conditions. Capital Markets Union should therefore focus more on equity financing instruments for companies. b) Granting of subordinated loans A higher risk appetite to grant subordinated loans (e.g. channelled through development banks) would also provide leverage to generate additional short and long-term credit lines. Centralised risk-mutualisation mechanisms (such as the EFSI) are necessary to unlock fragmented markets. The EFSI tries to address this, but there is some scepticism owing to (i) the governance of the EFSI and the project selection procedures; and (ii) the risk-mutualisation mechanism. Regarding the latter, it appears that currently under the EFSI only first-loss piece guarantees are envisaged. If the guarantee cap covers only the expected loss or if the guarantee is conditional - with the effect that there is incomplete adherence to the Basel criteria for risk mitigation - banks may not benefit from capital relief. In this case the guarantees will fail to interest many, if not most, banks. c) Introduction of definitions The Commission should take into account the current level of disparity between the different EU sectorial legislation, which complicates the picture for funding providers. For example, there are no cross-legislative definitions of small and medium-enterprises in EU legislation. In this regard, the Commission should consider developing a set of definitions which can be used throughout new EU legislation and phased into existing EU legislation. The categorisation process should be simple, enabling a firm to be easily identified by agreed descriptors. This categorisation may then be used by banks and finance providers to help determine the appropriate level of customer protection and finance options. d) Greater independence of external ratings Furthermore, the European Commission must ensure a greater independence of external ratings. The problems created by the overdependence are related to (i) ratings volatility, due to methodology changes, sovereign ceilings, counterparty caps and triggers; (ii) lack of Page 11 of 42

12 transparency in rating agencies mechanisms; and (iii) inconsistency with regulatory risk evaluations. Regulatory action in respect of standardisation may have unintended consequences if the mandated standard terms do not fit investor preferences at a particular point in time. Any type of standardisation should focus on transparency and disclosure rather than on economic terms (e.g. term, coupon types etc.). Finally, in order to improve the environment for regulated firms to provide market liquidity, the EBF encourages the Commission to take into account: greater recognition in the regulatory capital regime (including the leverage ratio regime) of market liquidity when determining solvency treatment for traded credit products; a more flexible credit mitigation regime and; a more flexible implementation of exiting credit mitigation rules. 6) Should measures be taken to promote greater liquidity in corporate bond markets, such as standardisation? If so, which measures are needed and can these be achieved by the market, or is regulatory action required? Market depth and liquidity are key components of well-functioning capital markets, key to investors propensity to invest. Hence, incentives and measures that foster and help issuers to reach critical market dimensions could be helpful. On that note, we would suggest that, instead of binding EU-level instruments, the Commission should consider using best practices or market driven initiatives to drive an increase of liquidity in this market. The primary reason for this, being, that today there are already well-functioning markets and local practices that have withstood the financial crisis and should be respected and further encouraged to grow. Market making is a legitimate commercial business for banks, and shall not be banned or ringfenced on account of structural bank reform initiatives at EU or national level. Hence, banks shall not be penalised for holding inventories of (corporate) bonds (credit and market risk, RWA). As part of the liquidity discussion, the EBF highlights the importance of MiFID II and MiFIR in SME financing. In our view development of new bond markets for smaller issuers is at the heart of the CMU. At the same time we are concerned, that wrongly calibrated pre- and post-trade transparency requirements could negatively affect market makers ability to provide liquidity in these emerging markets. Consequently, the Commission should have this under constant scrutiny in order to avoid any unintended consequences. In this context, it should be borne in mind that Article 9, in conjunction with Article 18, of MiFIR provides for comprehensive changes to market structures that will also apply to corporate bond trading. The concrete impact of the new provisions will depend particularly on whether bonds are correctly classified as liquid or non-liquid. Were non-liquid bonds to be wrongly classified Page 12 of 42

13 as liquid, systematic internalisers in such bonds would be exposed to unacceptable risks that could not be covered. This would, in turn, create the risk of the market drying up. It will therefore be crucial to formulate the details of Article 9(5) of MiFIR so that they ensure correct classification of each and every bond. The approach presented by ESMA on page 104 of the consultation paper 2014/1570 fails to meet this objective. The calculations made by ESMA for corporate bonds show very clearly that the parameters and selected thresholds fail to deliver satisfactory results: a success rate in correctly classifying liquid corporate bonds (issued by non-financials) of 48.62% and 42.86% for senior corporate bonds and subordinated corporate bonds respectively is unacceptable. Conversely, this means that 51.38% and 57.14% respectively of corporate bonds are classified as liquid although they are not (false positives). We believe that the parameters on which classification is based urgently need to be calibrated to ensure a success rate of at least 95%. Otherwise, there will be a high risk of dramatic decrease in liquidity. 7) Is any action by the EU needed to facilitate the development of standardised, transparent and accountable ESG (Environment, Social and Governance) investment, including green bonds, other than supporting the development of guidelines by the market? The EBF considers that public incentives (for instance, fiscal treatment, regulatory aspects, etc.) shall be foreseen in order to promote and develop ESG investment. The market for ESG investment is relatively new and needs more support in order to deliver long-term benefits to stakeholders. Regulators should be mindful of not stifling the embryonic growth of green bonds by swathes of regulation. The EBF would support the use of the EU Green Bond principles in this area. 8) Is there value in developing a common EU level accounting standard for small and mediumsized companies listed on MTFs? Should such a standard become a feature of SME Growth Markets? If so, under which conditions? The EBF strongly supports efforts to reduce the administrative burden of smaller and mediumsize listed companies. Although we agree that full application of IFRS standards to SME listed companies is very burdensome, we consider that it is important to have high quality accounting standards for smaller listed companies to ensure reliability, transparency and comparability of information. This said, the EBF is not supportive of a mandatory form of EU level accounting standards for SME Growth Market companies being implemented. We find that it is more important to develop accounting directives in order to reduce the administrative burden for SME listed companies. The IASB has for many years been pursuing the IFRSs for SMEs project. This standard is applied in a large number of countries across the globe. Since one objective of Capital Markets Union is to increase and diversify sources of funding not only in the EU but all over the world, the EU should not isolate itself from this development. Consideration should be given to whether the adoption of IFRSs for SMEs in the EU would be a suitable instrument for a common accounting standard for small and medium-sized companies seeking funding in SME growth markets directly via the market. Page 13 of 42

14 The EBF also believes there is value in creating standard business reporting (SBR) to help SMEs consider the choices available to them and to reduce barriers of entry for challenger banks. Nonetheless, a good balance must be sought, as both language and reporting templates should be simple (to allow SMEs to use them) but not excessively so (to allow banks to have all the data they need). The Commission should learn from countries where Standard Business Reporting (SBR) is established. In the Netherlands, Belgium or Australia for instance, SBR has simplified, harmonised and digitised a common set of financial statements to be used for tax filings, reporting to business registers and statistics offices and credit applications with banks and other lenders. Nonetheless, the EBF acknowledges that, as there is no fiscal harmonisation at an EU-level, it would be very challenging to establish a SBR for companies in the EU. Lastly, the EBF considers that it is important to harmonise EU regulation for auditors, since currently audit firms are regulated on a national and often divergent basis. 9) Are there barriers to the development of appropriately regulated crowdfunding or peer to peer platforms including on a cross border basis? If so, how should they be addressed? Financial crowdfunding (crowd-lending and equity crowdfunding) can play a significant role as a complement to traditional sources of financing, mainly for companies in the early stages of development and also for high-risk projects. Yet, financial crowdfunding platforms, and particularly peer-to-peer platforms, operating with products akin to financial ones, tend to carry out their activity with greater informality and lighter regulation, thereby increasing potential solvency risks. This exacerbates problems of information asymmetry between funding suppliers and those requesting it. Consequently, the EBF believes that there must be a compulsory and specific regulatory framework laying down a minimum set of disclosure information, risk factors, data transparency, use of proceeds, and harmonisation of required information. All this, in order to protect and correctly inform the individual investor. It is also important to note that crowdfunding platforms provide services that are very similar to regulated MiFID investment services. Some crowdfunding platforms have already applied MiFID licence and operate with a European passport. Possible new regulatory treatment of crowdfunding platforms should duly take into account the level-playing field. Identical or comparable activities require similar regulatory treatment. The Commission should carefully analyse different types of crowdfunding. Donation, reward, equity and lending-based, require differentiated treatment. 10) What policy measures could incentivise institutional investors to raise and invest larger amounts and in a broader range of assets, in particular long-term projects, SMEs and innovative and high growth start-ups? Page 14 of 42

15 Currently, exceptional demand from central banks combined with the structural demand for bonds caused by the changes in the financial sector regulation (i.e. Basel III and Solvency II), is leading to the trend of holding safer assets, regardless of the cost (negative yields). In order to motivate institutional investment it is important to: overhaul the regulatory framework that is currently in place, either by creating regulatory incentives for investors to fund longer-term/riskier projects (for example risk mutualisation mechanisms such as the one provided by the EFSI) or by reviewing capital charges and liquidity requirements; promote market making specialised entities, to allow investors to exit before maturity and not being penalised for doing so. Direct lending to businesses is likely to be challenging for institutional investors that typically are not equipped with the resources or expertise to perform the due diligence process that lending to businesses / originating infrastructure transactions requires, irrespective of a strong demand for investment in infrastructure, particularly. What is more, the costs associated with capital markets activity can be prohibitive to borrowers that do not benefit from scale (e.g. complying with Prospectus Directive requirements in terms of disclosure) and at the same time they are unable to enjoy the optionality embedded in bank products that better fits their business profiles. Financial incentives could be introduced to reduce the costs of providing finance to these important sectors. In addition, tax incentives to invest in such areas via funds for retail and institutional investors could also be introduced. For example, the US has specific tax incentives in place for lending to SMEs. 11) What steps could be taken to reduce the costs to fund managers of setting up and marketing funds across the EU? What barriers are there to funds benefiting from economies of scale? The EBF believes there should be less administrative burden when a passport has been granted. Currently, the passporting right is not fully respected (i.e. local regulator still require additional elements). The EBF recommends the Commission to consider adjusting the scope of AIFMD to make it possible to market alternative investment funds for retail clients across Europe. 12) Should work on the tailored treatment of infrastructure investments target certain clearly identifiable sub-classes of assets? If so, which of these should the Commission prioritise in future reviews of the prudential rules such as CRDIV/CRR and Solvency II? The EBF does not have a position on this issue. 13) Would the introduction of a standardised product, or removing the existing obstacles to cross-border access, strengthen the single market in pension provision? Page 15 of 42

16 The EBF does not think that the introduction of a standardised product would strengthen the single market in pension provision. Instead, this product may create a distortion and would have an adverse effect in countries where a healthy competition exists in this market. However, removing obstacles to cross-border access could indeed have a positive impact. Be that as it may, the introduction of a standardised product seems only realistic for 3rd pillar pensions. The obstacles to achieving a single market in the 2nd pillar are too big, considering the enormous differences in labour and pension laws across EU countries. This suggests that the potential benefits linked to the achievement of a single pensions market would be rather limited, given 3rd pillar pensions are far less common than 2nd pillar ones. Furthermore, a standardised product would still be hindered by the unresolved challenges posed by the lack of harmonisation from a tax perspective of pension products across the European Union. The complexity of such a product and its administration costs could be even higher than those of the existing products on a national level, since it would require the administration, reporting and handling of taxation requirements on a per country basis, thus potentially offsetting the greater efficiency and efficacy usually attributed to a pension s single market. It is also unclear whether distribution costs would be lower, since a standardised product would be primarily sold (at least in certain countries) through national distributors at the existing rates. This, combined with the aforementioned increase in administration costs could possibly mean higher, and not lower, costs that would then be either partially or totally - passed on to the consumer. For pan-european online platforms the challenge would be to deal, at the same time, with higher administration expenses to tackle national complexity and significant marketing costs, especially in those countries where the provider is not widely recognised and/or does not have brick and/or click operations. Finally, it should be taken into account that when it comes to pension savings the main challenge is to save more in order to deal with the increasing longevity and to provide adequate and sufficient income for future pensioners. This is a very demanding task that is unlikely to be solved through the potential merits of a single pension s market even if (and in spite of the obstacles that make it a challenging objective) it actually delivers its full potential. 14) Would changes to the EuVECA and EuSEF Regulations make it easier for larger EU fund managers to run these types of funds? What other changes if any should be made to increase the number of these types of fund? For the time being the EuVECA and EuSEF regimes have generated very little enthusiasm among our members. The EBF is rather sceptical whether further changes would generate significant effects. 15) How can the EU further develop private equity and venture capital as an alternative source of finance for the economy? In particular, what measures could boost the scale of venture capital funds and enhance the exit opportunities for venture capital investors? Page 16 of 42

17 The development of public and private initiatives has proved successful in some countries already (for example, the Italian Fondo Italiano d Investimento ). Particularly interesting is the use of funds-of-funds, which co-invest in private equity and private debt funds dedicated to small and medium-sized companies and venture capital funds. The impact of this type of initiative is twofold. First, it increases the size of the funds raised, increasing the amount of capital available for VC and PE investments. Second, it reduces the risk for other private investors in these funds, by accepting lower returns than other private investors in the fund. By doing this, it reduces the risk of other investors, without altering, however, the normal and efficient investment process that VC and PE funds should have (e.g. invest in those companies with the highest upside potential). Private equity and venture capital need to be unlinked from hedge funds. As many people tend to link private equity and venture capital, they have been subject to considerable regulation, detrimental to an industry whose intention is to invest money in the real economy. The European Commission should aim at creating the right institutional factors for the emergence of a richer pan-european venture capital industry. Several objectives should be pursued in that respect: bring the industry to efficiency levels equal to more advanced ecosystems (such as in the United States or Israel); create a pan-european industry as opposed to an industry structured around national clusters; this, beyond obvious network efficiencies, will eventually boost pan-european start-up champions and will create a richer innovation industry spanning across the EU, as opposed to the current ecosystem that is increasingly polarised around a few hubs (London, Berlin). This could be instrumented through a number of diverse measures For all funds (institutional and corporates): facilitate establishment of funds by first-time fund managers through public support programmes, co-investment schemes by the EIF or other European bodies, tax incentives on managers committed capital, etc.; facilitate angel investing by providing a favourable tax treatment for individuals investing small amounts in early-stage companies such as the programmes already provided in certain countries (e.g. Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) programmes existing in the United Kingdom); reduce national clusters by facilitating cross-border funds; this could be achieved by further unifying fund establishment requirements in terms of registration (unique European registration), marketing (truly passport-able fund marketing requirements across the EU) and the homogenisation of tax regimes. For corporate funds Facilitate Corporate Venture Capital (CVC) operating under the same rules as institutional Venture Capital (VC) to make them competitive with the rest of the industry. Page 17 of 42

18 Review or limit industry-specific regulation that affects the way that CVC are governed. In the banking sector, for instance, CRD IV regulations affect the economics for fund managers by limiting the interest that fund managers - also bank employees -could receive. This puts banking CVC managers at a disadvantage to their peers in institutional funds. Limit regulation that is intrusive in the investment process. In particular, the current proposal of extending the Merger Regulation (Regulation (EC) No 139/2004 on the control of concentrations between undertakings) to cover minority non-controlling investments deserves some considerations referring to CVC investments in SMEs and start-ups, in order not to reduce CVC s competitiveness against institutional Venture Capital in competitive investment processes nor to hamper the flow of funds that CVC could provide. The Commission is currently seeking views on a possible extension of the EU Merger Regulation in order to be able to take action on transactions that, being minority investments, may raise competition concerns. However, the proposals introduced in the paper Towards more effective EU merger control could have a negative impact, by hampering the flow of funds that private equity and venture capital companies could provide. The main issues to be reviewed are related to the additional administrative burden that would be introduced, that could increase both costs and delays in the injection of funds. This situation is particularly self-defeating to those SMEs and small start-ups that need the funds urgently in order to survive. The notification regime would impose significant costs on small companies with limited resources and negative cash flow. The Commission is also considering the proposal of a 15-day waiting period once an information notice has been submitted, during which the parties would not be able to close the transaction and during which the Member States have to decide whether to request a referral. Such a waiting period would discourage acquisitions of minority shareholdings in capital markets where decisions are taken in minutes. Exit opportunities for the venture capital industry There are essentially three ways in which a venture capital or private equity investor can exit an investment: through public offering of company shares, through a trade transaction (merger or acquisition of the company), or through a secondary sale to a third-party investor (typically, an investor investing at later stages). On each of these fronts, institutional conditions could be improved. Improving access to public markets Unify alternative listing markets as a way to create a single market with more liquidity than individual national markets. Facilitate listing requirements for start-ups while creating a sound compliance environment to build consumer trust in investing in less mature technology-based companies. Improving start-up acquisition by industrial players As part of the revision of the Merger Regulation, make sure that newly proposed rules do not overwhelmingly burden the acquisition of venture-backed start-ups by industrial incumbents. Page 18 of 42

19 Create tax incentives for Mergers and Acquisitions that generate innovation for incumbent players e.g. extend R&D tax credits at technology-based acquisitions. Improving liquidity among venture capital and private equity investors Avoid double taxation in Mergers & Acquisitions among similar private equity investors. 16) Are there impediments to increasing both bank and non-bank direct lending safely to companies that need finance? Lending safely does not look to be an appropriate term for lending activities. Nonetheless, it is true that current regulation capital and liquidity - create significant restrictions and costly additional requirements that, in the end, constrain direct lending to companies. The existing requirements demand significantly high levels of capital and bias the exposure towards more liquid assets. Moreover, bank and non-bank direct lending should not be seen as mutually exclusive, but rather as complementary through well-designed co-lending practices. And given that appropriate regulation is introduced to preserve the level playing field among activities that would be providing the same service. Banks could be willing to collaborate with alternative lenders in order to meet their clients needs without imposing an additional burden on their own balance sheets. Finally, to improve the conditions for an entity to lend, it needs to have certainty of the rules with which it must comply and the particular jurisdiction it intends to lend. For example, when new EU rules are coming into force, there is a period of uncertainty prior to the date of implementation. Additionally, ESMA opinions and guidelines create an uneven playing field as they are not implemented uniformly across Europe. A period of legal stability and certainty is needed to allow lending activity to recover. Latest Europe wide surveys show an improvement in credit conditions. The challenge is often one of demand and confidence amongst SMEs in the economic outlook as well as perceptions of the availability of finance and the viability of requests given the weak balance sheets and the low and volatile levels of many borrowers profitability. This may be addressed best through support focused on financial capability and the provision of equity where appropriate. 17) How can cross border retail participation in UCITS be increased? As a preliminary remark, the EBF would like to underline that UCITS is only one part of the overall picture of retail investment in funds. Non-UCITS (i.e. AIFs) are also of major importance for retail investors in Europe. The EBF agrees with the Green Paper statement (page 17), that the regulatory cost of setting up funds and the barriers to becoming authorised managers and selling them across borders creates disincentives for both investors and issuers of investment funds in the EU. Reducing these barriers would encourage new market entries and/or increase the range of UCITS and Non-UCITS products available. This would give more choice to consumers to invest their savings into structured debt, securitised products or investment funds. For this to happen it is Page 19 of 42

20 imperative to re-establish trust of the wider public and of consumers in financial markets in general, inter alia by enhancing intelligent consumer and investor protection. 18) How can the ESAs further contribute to ensuring consumer and investor protection? ESAS s mandate allows them to have a crucial role in rule-making, either by designing and setting rules (regulatory and implementing technical standards) or by generating soft law (guidelines and recommendations). Nevertheless, the recent European experience has been an example of regulatory overshooting situations, where these dominant agencies on paper are not equally efficient regulators when formal mandates are translated into actual practice. We have experienced that there is a tendency to raise member state specific concern at the ESA-level. As a result, the level of detail of guidance and red tape will increase significantly in the area where the subsidiarity principle should apply. In our view regulation should intervene only on large-scale, severe problems. Single issues should be dealt with by means of supervision and, if needed, by using the penalties and sanctions contained in EU regulation. The EBF supports a consistent and coherent regulatory approach to EU consumers. Investor protection rules in MiFID, IMD, and PRIIPs should be carefully coordinated. There are still remaining inconsistencies on the level I text that eventually need to be handled in revised regulations and directives. We believe that the problems should not be solved in ESA guidelines but at level I. In particular, we very much appreciate the efforts of ESMA in increasing retail investor protection by setting additional rules in its Technical Advice to the Commission in the context of MiFID II/MiFIR. Banks are committed to ensuring further improvement of investor protection and to restoring investor confidence in the financial markets. This said, setting such detailed rules should not be detrimental to the accessibility of retail investors to: (i) the financial markets, (ii) investment services and (iii) a wide variety of investment products offered or distributed by investment firms. Rules related to investor protection then should always strike the right balance between the interest of protecting retail investors and the investment firms being able to offer investment services. Increasing detailed obligations or burden on investment firms in the interest of investor protection may lead to decisions of investment firms or banks no longer offering their investment services to the retail market. Or it might drastically decrease their investment product offering, since such a business model may no longer be viable. Or, lastly, it may increase the costs of investment services, which ultimately will be paid by the retail investor. As a result of this the aforementioned accessibility of retail investors will come under pressure. 19) What policy measures could increase retail investment? What else could be done to empower and protect EU citizens accessing capital markets? Page 20 of 42

21 The broadening of the investable asset classes and motivating retail customers to invest directly in capital markets will necessarily mean retail investors become more exposed to risk. Part of the solution is to foster a culture of responsible risk-taking among investors, namely to create a bigger appetite for equity finance. In order to broaden the investor base, it is necessary to improve the public s knowledge about the merits and risks of investing in the capital market. The EBF would ask for simpler approaches to product or service offering. We would foresee for example a lighter procedure to portfolio management, but with access to detailed information on an ad hoc basis or on the website of the investment firm. Simpler procedures avoiding excessive paperwork and procedures will also help. 20) Are there national best practices in the development of simple and transparent investment products for consumers which can be shared? In Portugal, there exists an individual pension product whose primary objective is to capture individuals savings for retirement. This financial product can be wrapped up as an insurance products, investment funds or as pension funds but it follows similar rules, namely prudent rules for portfolio composition, portability, and access to benefits. As experienced in the Portuguese market, it is possible to launch a harmonised regulatory framework at EU level for these kind of products, which does not undermine innovation and product design. 21) Are there additional actions in the field of financial services regulation that could be taken ensure that the EU is internationally competitive and an attractive place in which to invest? The promotion of international investment is crucial in a post-crisis context, and resilient crossborder investment can become an essential source of long-term financing for Europe. To ensure that EU capital markets remain attractive to investors and issuers internationally the financial service regulation should ensure certain safeguards and protection to guarantee the necessary legal certainty for investment to materialise. First of all, improving the investment environment in the Single Market as a pre-condition to ensuring that the EU is attractive for foreign investors. Lack of harmonisation of legal and/or tax frameworks, among other things, is already troublesome for European agents and even more so for international investors who are less familiar with the particularities of European markets. Third country investors or borrowers, need to be able to view the EU as a single regulatory environment rather than having to carry out due diligence in the member state(s) in which they want to invest, this can be achieved by centralising the supervisory authorities and competent authorities at EU level. Regulatory equivalence and mutual recognition agreements, signed between the EU and selected third countries that also apply the highest regulatory standards, can reduce the legal uncertainties that might hinder international investment, and thus facilitate foreign investment from and to the EU. Regulatory equivalence should be based on the comparability of the outcomes rather than on the details of the rules. This requires: i) Page 21 of 42

22 functional equivalence (different rules that lead to a similar outcome), and ii) cost equivalence (meaning similar regulatory burdens). To attract foreign investors into EU markets, Europe should guarantee the consistent implementation and enforcement of the highest regulatory standards. At the international level, Europe should contribute to the creation of a level playing field through its participation in international organisms and fora. If Europe aims to be a cornerstone of international financial markets, it should lead the international debates on financial market regulation. The EU could also consider the creation at the Commission of an Investment Helpdesk for foreign investors and/or the opening of investment representation offices abroad Finally, greater communication and co-operation between EU regulators and third country regulators is necessary. Greater efforts must be made by the Commission to ensure that equivalence rulings are carried out, particularly with the US. Lack of clarity in how to comply with overlapping EU-US legislation (e.g. Dodd-Frank Act and EMIR) leads to uncertainly in the market. Additionally, to encourage third country investment, the European Commission should take action to limit the extraterritorial effect of third country regulation on the EU (i.e. FATCA, Volker Rule, Dodd-Frank Act), as these additional rules could also discourage investment activity. 22) What measures can be taken to facilitate the access of EU firms to investors and capital markets in third countries? CMU embraces major international and cross-border aspects as the Green Paper rightly acknowledges: Given the global nature of capital markets, it is important that the CMU is developed taking into account the wider global context. (p. 20). Open markets and multilateral cooperation essential Both open markets and multilateral cooperation have been central in Europe s post war economic framework. This openness has underpinned its economic growth, enhanced its economic development, and has served as an important shock absorber, not least during the global financial crisis. Free trade and close collaboration are not outdated principles. Ample historic evidence tells us impressively that both principles have served Europe well over many years. They deserve being upheld and even reinforced in the light of recent experience. Europe s still-nascent capital markets The inception of CMU is a welcomed opportunity to strengthen the Single Market. Europe s capital markets are still fragmented further. Europe s challenge involves more than creating alternatives to bank lending to fund the recovery. It needs to make the structure of the financial system more competitive and efficient, and ultimately more growth-friendly. This is an area with huge development potential. Had Europe s capital market issuance between 2009 and 2014 been similar to the United States as a proportion of GDP, it would have been more than double its actual size, i.e. 9 trillion instead of 4 trillion. With their foreign direct investment (FDI) and technical expertise non-eu countries can contribute their share to the success of the future CMU. In an even broader view, it is EBF Page 22 of 42

23 conviction that developing and implementing successfully both the Banking Union and CMU can be achieved more easily and more realistically in conjunction with strong and competent third country partners. To the mutual benefits of all involved. The EBF would therefore like to encourage the responsible authorities of the EU to consider all measures helping to ensure that benefits from economic cooperation with key partners can still be reaped in the future. In particular, attracting capital flows and investment from within and from outside the EU to support the real economy, and particularly SMEs, is and remains a decisive ability to be preserved and strengthened. Attracting capital flows and investment from within and outside the EU The Green Paper suggests, as one method of choice, that direct marketing of EU investment funds and other investment instruments in third countries should be facilitated. The Commission is interested in views on measures that could be taken to increase the attractiveness of EU markets to international investors. What measures can be taken at EU level to facilitate the ability of third country financial intermediaries to invest a growing part of their pooled savings in the EU? Essentially, there are two ways to unlock more investment for EU companies and attract more investment from outside the EU: a) to increase the chances of savings being pooled and managed outside the EU to be invested in EU, for instance via sizeable EU-wide investment funds and, b) to enhance the possibilities that such funds (for instance UCITS) are marketed successfully and globally to all kind of customers, including to EU-citizens via cross-border sales from outside the EU. Improve general economic conditions sustainably For this to happen it is of fundamental importance that not only the numerous CMU-related issues are appropriately regulated but that, in addition, general economic conditions and future prospects of EU Member States will be sustainably improved. By far the most decisive single factor to increase and maintain the attractiveness of EU markets to international investors is the expected forthcoming investment performance. Only if and when these prospects can be advanced successfully, will the CMU have a fair chance to compete with other major capital markets for investment opportunities thereby attracting capital from third countries. 23) Are there mechanisms to improve the functioning and efficiency of markets not covered in this paper, particularly in the areas of equity and bond market functioning and liquidity? Transparency requirements in certain non-liquid markets might have the effect of reducing the liquidity in these markets. They also decrease the interest of issuers and investors in entering such markets. Regarding equity markets, potential risks and market contraction that the EU FTT might generate in case it would be applied for certain EU members (liquidity reduction). This would generate a distortion in the market. To avoid this, it is necessary to have a harmonised treatment at the European level. Page 23 of 42

24 24) In your view, are there areas where the single rulebook remains insufficiently developed? The single rulebook could be further developed in the scope of macro-prudential supervision. The EU should put in place a true macro-prudential framework that helps to achieve the financial stability objective whilst maintaining consistency with the rest of the regulatory reform. Today, macro-prudential powers are allocated to Member States, national competent authorities and national designated authorities. In many cases the powers of the vested authorities do not suffice for a clear-cut definition of responsibilities and accountabilities. The interaction with other prudential measures in the realm of micro-prudential supervision creates overlaps. Against this background, the EBF has requested further coordination between Member States but the right solution should be to develop a true single rulebook in this field. As stated by the ESRB in its recommendation 1 of 2013, the current legislative framework is characterised by a complex and diverse set of macro-prudential provisions, which would greatly benefit from simplification and overall consistency in future reviews. From the point of view of banks, the time has come to conduct a thorough review of all sorts of macro-prudential policy tools and take a decisive step to implement a single rulebook on this front. The disclosure requirements for issuers accessing the capital markets constitute an aspect of the single rulebook which is perhaps not that realistic. The prevailing legal norms seem to be unnecessarily burdensome due to their complexity and inconsistency without adding much value for the investor. The disclosure regime in the European Union is framed by five sets of rules which are not synchronised and onerous and inefficient: a) Companies with liability limited by their shares must disclose their annual reports in a public register (Directive 68/151/EEC (First Directive on corporate law), now superseded by Directive 2009/101/EU). This applies as a result of their legal form and size and regardless of whether or not they are listed. The purpose is to protect third party creditors. b) Access to the public capital markets (by a public offer of securities or admission to trading of securities on a regulated market) requires filing and publication of a securities prospectus under the Prospectus Directive (2003/71/EU). This includes the annual report that has already been published under a). c) Having securities outstanding that are admitted to trading on a regulated market subjects the issuer to ongoing reporting requirements the Transparency Directive (2001/34/EU, superseded by Directive 2013/50/EU). For issuers launching another offering or applying for the admission of new securities to trading on a regulated market these reports do give any leeway for their obligations under b), even if the securities offered or admitted are of the same class already offered or already admitted to trading. Until the final closing of a public offer or, if later, the beginning of trading on a regulated market every significant new factor has to be published in a supplement to the prospectus, following its prior approval by the relevant national competent authority (NCA). d) Under the Regulation on key information documents for investment products of 24 November 2014 (Regulation (EU) No 1286/2014) the issuers ( manufacturer ) will also Page 24 of 42

25 have to prepare a key information document (KID), if the issuance targets retail investors (Art. 5) and any seller shall provide the investor(s) with such document (Art. 12). This leads to the question which purpose a securities prospectus under b) will serve going forward and which relevance it will have. e) The Market Abuse Directive (Directive 2003/6/EC) and as from mid-2016 the Market Abuse Regulation (Regulation (EU) No 596/2014) issuers of financial instruments admitted to trading on a regulated market are to inform the public as soon as possible of inside information which directly concerns the said issuers. Therefore, the envisaged Capital Markets Union (CMU) is a perfect opportunity to synchronize these different rules and to develop a disclosure regime where all these elements seamlessly tie into one another without duplication or overlaps. Against this background one should consider the following points for a CMU: a) Issuers should choose a home state when going public (most likely the one with the primary listing). The securities regulator of the home state will have the responsibility for the securities prospectus and all the subsequent filings and keep these in one central repository. b) Repeat issuers may refer to earlier filings/publications in particular for annual and interim reports in subsequent securities prospectuses; the mere listing of securities already admitted to trading on a regulated market no longer require a prospectus. In general, no financial information or annotations/explanations thereto will be required in the prospectus that cannot be provided by reference to annual and interim reports previously filed. c) Automatic effectiveness of prospectuses of issuers that have been public for a long period of time and access the capital markets on a regular basis. d) Information that has already been made public by an ad-hoc release under the Market Abuse Directive or Regulation, respectively, does not require a separate prospectus supplement; a public notice simply referring to that publication will suffice with no NCA approval being required. e) Otherwise, in the interest of investor protection, one single disclosure standard for all issuers. f) Passporting of prospectuses with a summary in the host country language has proved to be a fair balance between efficiency and investor protection provided it is no longer tolerated that host member state NCAs only accept passported prospectuses when additional requirements defined by them on a national level are fulfilled despite the original prospectus being approved by the home member state NCA. g) Harmonize the liability rules for securities prospectuses. h) Make the prospectus the key document for investment decisions and size the relevant information accordingly. Also, ban advertising for securities and other publicity measures that could distract from the securities prospectus during the offering phase. i) Refer the concept of a key information document for securities to the sphere of investment advice (e.g. amendment to Art. 24 of Directive 2014/65/EU (MiFID2) or a delegated act thereto). Page 25 of 42

26 Recovery and resolution framework for financial markets infrastructures The EBF notes that the Commission s proposal for a recovery and resolution framework has been in the pipeline for some time. The role of especially central counterparties in the capital markets chain has been growing in recent years. These entities have become a possible source for new systemic risk. To avoid future problems in the function of the capital market infrastructure, a solid and predictable framework for recovery and resolution of CCPs has to be created. The framework should stress the importance of resolution plans that are drafted in a transparent manner together with the members and supervisors of those infrastructures. Their possibilities to participate in the process will increase the workability of those plans. Additional contributions by others than shareholders of those entities should be avoided to the largest extent. 25) Do you think that the powers of the ESAs to ensure consistent supervision are sufficient? What additional measures relating to EU level supervision would materially contribute to developing a capital markets union? We think that the powers granted to the ESAs seem to be adequate to ensure a single rulebook in the EU as well as consistent supervision. Further capacity beyond that point could overstep the field of national corporate and fiscal laws in some cases. 26) Taking into account past experience, are there targeted changes to securities ownership rules that could contribute to more integrated capital markets within the EU? Taking into account past experience, the EBF is in favour of targeted changes that could contribute to more integrated capital markets within the EU. Targeted changes could be made in order to improve or even solve some of the issues listed below: a) The EU needs to harmonise the process for resolving conflicts of cross-border securities ownership rules: If an EU investor holds an asset in another member state then crossborder jurisdictional implications arise. Conflict of laws rules differ between member states, so disputes arise as to which jurisdiction should be used in order to resolve differing claims of securities ownership. The EBF considers that efforts should now be directed at specifying mechanisms for identifying the jurisdiction and mechanisms for resolving cross-border ownership disputes. Improving the process for resolving conflicts of laws will also help to clarify cross-border issues in collateral ownership. As a general rule, the law applicable to securities credited to a securities account is the law of the country where the relevant account is located. This rule is currently provided for in the Settlement Finality Directive (SFD), the Financial Collateral Directive (FCD) and the Winding-Up Directive. It was discussed in the legislative process of Central Securities Depositories Regulation (CSDR). Although few, if any, cases of uncertainty have arisen around this question (other than in the field of collateral) a general conflict of law rule would be welcomed. In the case of an intermediary s (account provider s) insolvency, such a rule could help. Page 26 of 42

27 Other targeted changes could include the following: Account holders should not compete with the insolvent intermediary s creditors; Account holders should have the possibility to instruct the insolvency administrator to transfer the securities to another securities account held with another intermediary; and In case of securities shortfall, the intermediary s proprietary securities should be affected in priority to the insolvent intermediary s clients that suffer from the shortfall; It should be ensured that title transfer takes place at the moment of settlement in the securities settlement system, and that this is accordingly reflected in the book-entries of the transferee; and It should be ensured that intermediaries are required on a continuing basis to reconcile the securities positions they hold for clients with the amount of securities held upper-tier (with another intermediary or with a CSD), in line with CSD Regulation Art. 37. b) Transparency over the chain of ownership of securities in the EU needs to be further improved: There have been EU initiatives to improve transparency of securities ownership in recent years, but in some countries ownership can still be opaque. For example, some EU countries have no process in place to establish any significant degree of transparency of the ownership chain. In this regard, it would be helpful if each country were to have a structure to enable foreign investors to operate through intermediaries without reducing the ability to claim assets back - such structure should include omnibus accounts where used. As a general rule, the credit of securities to a securities account corresponds to the legal position of the account holder in the securities, or the holding of the securities for the account holder s clients. c) Rules concerning scope and legal persons in EU securities legislation are currently too limited. The Settlement Finality and Financial Collateral Directives have helped to harmonise certain key aspects regarding settlement finality and financial collateral. However, the material and personal scope of these directives could be widened. In addition, the national laws transposing the directives differ significantly, leaving ways for many opt-outs. Consequently, there are still many areas of considerable legal uncertainty on important aspects regarding settlement finality and financial collateral. In view of the fact that the recent regulatory changes presume and rely on the effectiveness and legal certainty of settlement systems central counterparties and other financial market infrastructures, further harmonisation would be welcome. Please also refer to our response in Q ) What measures could be taken to improve the cross-border flow of collateral? The importance of collateral and its free movement has increased and will be critical to the success of CMU. The EBF notes that there are different ways of taking collateral and considers that in itself the legal form of creating collateral is not generally critical. The EBF accordingly considers that there is no pressing need to harmonise the precise legal features, but is keen that the process to identify jurisdiction can be clearly determined. We also recommend the following measures to improve the cross-border flow of collateral: Page 27 of 42

28 Review of the interaction of recent regulatory measures affecting collateral flow. Regulatory measures (in particular MiFID, EMIR, SFT) have been very helpful, but should be reviewed regarding potential unintended obstacles or restrictions on the use of full title transfer, omnibus structures or other effects on collateral use and collateral flow; Further harmonisation of methods of creating collateral. Further harmonisation of methods of creating collateral will assist the continuation and coordination of ongoing initiatives to harmonise insolvency laws of member states in respect of the treatment of collateral; Further harmonisation and alignment with international developments (Unidroit netting principles) of the legal basis for close-out netting agreements. Such harmonisation and alignment would greatly improve legal certainty and strengthen close-out netting as an essential risk mitigation instrument. In addition, we note the following continuing issues that need attention concerning collateral: Segregation of collateral. Omnibus holding of collateral must be considered as a viable alternative to individual segregation. Recent regulatory initiatives appear to demonstrate a preference for individual segregation of client collateral. However, omnibus holding is generally a safe and efficient means to ensure protection of client collateral; Further harmonisation of the legal process for the realisation of collateral. Such process would benefit from further harmonisation Should work be undertaken to improve the legal enforceability of collateral and close-out netting arrangements cross-border? Yes, as specified in our answer to question 27 above. 28) What are the main obstacles to integrated capital markets arising from company law, including corporate governance? Are there targeted measures which could contribute to overcoming them? In its action plan of 12 December 2012 entitled: European company law and corporate governance a modern legal framework for more engaged shareholders and sustainable companies, the European Commission has already outlined how more integrated capital markets could be achieved. The action plan resulted particularly in the proposal for a directive amending Directive 2007/36/EC as regards the encouragement of long-term shareholder engagement and in Directive 2013/34/EU on the annual financial statements, consolidated financial statements and related reports of certain types of undertakings. This is likely to promote the cross-border exercise of shareholder rights further. When considering any further measures, the Commission should pay attention to different shareholders participation and minority shareholder protection schemes already in place in the EU and to the differences between single and dual board systems. Proposals should also undergo a cost-benefit analysis. When further developing European company law with regard to cross-border mobility and restructuring, it should be borne in mind that companies encounter legal obstacles or impediments to their EU-wide activities that are not rooted primarily in company law. For Page 28 of 42

29 example, neither the supranational legal entity of the European Company (SE) nor cross-border activities in general are accompanied by a tax regime that governs priority issues, i.e. the tax treatment of corporate relocation across borders and the recognition of losses on foreign direct investment at national level, in a tax-neutral manner. Additionally, the EBF highlights that the goal of achieving harmonisation of corporate law and of corporate governance, as outlined in the Green Paper, goes in the right direction. Nevertheless, the fact is that Small and Medium Enterprises still have a number of major drawbacks, at national level, in their efforts to expand their cross-border business activities. This undoubtedly correlates with the fragmentation in several aspects of company law in the various Member States. Thus, promoting a Single EU Passport (single licence) for all types of undertakings, authorised under one Member State only would surely be an element of major contribution to the aspirations set out in a project such as the Capital Markets Union. 29) What specific aspects of insolvency laws would need to be harmonised in order to support the emergence of a pan-european capital market? In general, insolvency frameworks tend to differ significantly from one Member State to another. Company and insolvency law frameworks are based on different legal systems that are embedded in an individual country s legal history, culture and procedures. The European Commission has been reluctant to include material insolvency law within the scope of its harmonisation agenda under the internal market policy and has preferred to rely mostly on non-binding recommendations, except for the rules regarding the jurisdiction in cross-border insolvencies. However, full harmonisation of the said sector is unlikely to be a realistic goal, mainly due to the fact that in the majority of Member States significant links between insolvency legislative framework and corporate law as well as national constitutional principles exist. Given that, there could be a partial harmonisation in specific aspects, for which there is a need to have extensive consultation at EU level. Thus, except for the aspects highlighted in the draft response, it should be noted that the review of the preferred creditors regime is of high crossborder importance especially when we seek to diversify the channels of funding. We believe that several aspects would still need to be analysed. Below we provide a list of concrete examples that hinder and raise costs of cross-border investments. In a longer-term the EU should address these issues: Different management systems; in some countries insolvency processes are carried out by accountants on a largely commercial basis, subject to statute and the Court. In other countries, the process is carried out by lawyers as a legal process. The two methods lead to very different approaches, even though the aim to maximise realisations (either going concern or liquidation) for the benefit of creditors is fundamentally the same throughout. The moment of insolvency of a multi-national organisation should be the same throughout the EU (and preferably elsewhere too). There was a time difference of some hours between the insolvency of Lehman entities in the USA and Europe, leading to subsequent difficulties. Difference of operational insolvency procedures is a problem. Further harmonisation would be beneficial for markets since currently there is considerable heterogeneity in the rules and procedures followed by CSDs in different markets and jurisdictions. While in some jurisdictions, transfer orders are put on hold or cancelled, in others, CSD accounts of Page 29 of 42

30 the declared insolvent participant are blocked. This generates uncertainty and discourages cross-border activity. Processes must evolve for quicker distributions to claimants by an insolvency practitioner (IP), without liability coming back on the IP (in the absence of negligence) if it later turns out he has made an erroneous distribution. 30) What barriers are there around taxation that should be looked at as a matter of priority to contribute to more integrated capital markets within the EU and a more robust funding structure at company level and through which instruments? In 2001 and 2003 the Giovannini Group of financial market experts advising the European Commission on financial market issues, published two reports outlining "inefficiencies in clearing and settlement represent the most important barrier to integrated financial markets in Europe." And that their removal was "a necessary condition for the development of a large and efficient financial structure in Europe". The Giovannini Report identified 15 barriers to an efficient pan-european clearing and settlement system. Two of which, (11 and 12) relate to fiscal compliance procedures. Barrier 11 - domestic withholding tax regulations, Barrier 12 - national provisions requiring that taxes on securities transactions be collected via local systems. In answer to Q30, the EBF would like to remind the Commission of the barriers identified 15 years ago by the Giovannini Group which the Commission and the Council have not removed or even addressed. The Commission and the Council have also failed to provide any solution to the shortcomings of the VAT regime as it applies to financial services. As a result, some Member States, with the support of the Commission, envisage now introducing an FTT scheme which will dramatically damage financial markets. Against this background, the EBF has identified 4 existing or potential tax obstacles to more integrated capital markets: Hurdles and disincentives which may arise from the introduction of a Financial Transaction Tax (FTT); Inefficiencies of standard Treaty relief procedures; Inconsistencies in the VAT regimes; and Potential implications of OECD proposals on Base Erosion and Profit Shifting (BEPS). In addition, the EBF would like to express views about the alleged inconsistencies in the tax treatment of debt and equity. a) Hurdles and disincentives which may arise from the introduction of a Financial Transaction Tax (FTT) By increasing the cost of secondary market trading in participating Member States, the FTT would reduce liquidity and so make capital markets a less attractive place for investors. This Page 30 of 42

31 would impact both primary and secondary capital markets, since the ability to trade securities on the secondary market makes it more attractive in the first place. The negative consequences of the tax would be proportionate to its huge effective magnitude, taking into account the cascading effect. They would disincentivise on-exchange trading and clearing. A research study conducted in 2014 by Ernst & Young for the Commission shows that the collection of the tax remains a major challenge, raising the issue of the collection cost, possibly out of proportion with the revenue generated for a number of the participating countries. The first Giovannini Report of November 2001 identified 15 barriers associated with the clearing and settlement of cross-border securities transactions within the EU. Barrier 12 consists of national provisions requiring that taxes on securities transactions must be collected via particular local settlement systems narrowing the choice available to investors and impairing cross-border activity. b) Inefficiencies of standard Treaty relief procedures Responding to the report Clearing and Settlement in the European Union the Commission formed the EU Clearing and Settlement Fiscal Compliance Experts' Group ('FISCO'). One of FISCOs objectives was the resolution of Giovannini Barriers 11 and 12. To forward the work of the FISCO group the Commission adopted a Recommendation on Withholding Tax Relief Procedures (COM (2009) 7924 final) and formed the Tax Barriers Business Advisory Group (T- BAG) in June In May 2013 the T-BAG report was issued. The EBF welcomed the Commission-sponsored initiative i.e. the T-BAG recommendations and note that the T-BAG report concluded that Tax relief at source should be applied by financial intermediaries, authorised in a contract provided by Member States, and supported by a simplified requirement for documentation of beneficial ownership, integrated with existing international regulatory principles such as know-your-customer rules (KYC) and anti-money laundering principles (AML). The group also made specific recommendations with respect to post pay date refunds. These recommendations focus on improvements to efficiency and use of technology that will lead to a more consistent reclaim process for Member States, intermediaries and investors alike. The T-BAG Group reviewed the both FISCO reports, together with an analysis of the US withholding tax system and the projects underway at the OECD, notably the Tax relief and Compliance Enhancement Implementation Package (TRACEIP) to establish, from experience, some of the best practices that could be incorporated into an E.U. withholding tax system. It recognised that the most advanced system in this area was the work of the OECD and its TRACEIP. Page 31 of 42

32 Sadly, no solutions have yet been taken forward. Yet it would seem that many of the barriers that impeded potential implementation of a harmonised and simplified tax relief at the source system no longer exist. The EBF believes that transparency of taxpayer information, which will be enhanced by the forthcoming implementation of the OECD Common Reporting Standard (CRS) and the Revised Directive on Administrative Cooperation (DAC2), should not only serve governments' aim of combating tax evasion, but also the interests of savers and investors across the EU to be able to access the treaty benefits to which they are entitled. With the amendment to the DAC in regards to tax information sharing agreements we believe the EU Commission has an opportunity to help take forward harmonization of tax relief procedures simultaneously with implementation of the DAC and work towards developing the most effective tax relief at source system possible, and ensure governments recognise the benefits of a harmonised tax relief at source system. Specifically we note that implementing the DAC implies a very substantial investment of money and resources on the part of EU Member States and the financial industry to put into place the systems necessary to achieve its objectives. Significant efficiencies could be achieved for both business and governments by covering both DAC2 and a simplified withholding tax relief at source system simultaneously. This means taking into account the information requirements of both residence and source countries, but the issues related to doing that in the TRACE context have already been identified and resolved, so implementation of DAC would not be delayed by the added focus. Taking this into account, the EBF believes that without any legislative initiative the implementation of and compliance with the T-BAG recommendations may be difficult to achieve. In the context of a capital markets union, without a harmonised, streamlined relief at source system, investors and intermediaries will continue to face the increasingly costly administrative burdens of varying domestic procedures. Excess tax will often be withheld and source countries will be less attractive to investors. Indeed as the tax drag on an investment return can be significant investors may choose to invest locally in order to avoid dealing with complex and costly procedures. Residence countries will see their base eroded and will continue to face costs in the form of processing certificates of residence, underreporting of income, and/or over reporting of foreign tax credits. Source country governments who continue to operate tax reclaim systems will continue to bear the costs associated with such a system, such as the stamping and certification of tax reclaim forms and processing refund payments. Information aligning the implementation of an AEOI system with a simplified withholding tax relief at source system would reduce, and in some instances eliminate, many of these costs. The complexity and cost of obtaining the tax relief to which an investor is legally entitled often lead investors to forego the relief. Full withholding at the maximum tax rate is then the outcome. Even though the financial intermediary has access to accurate customer information and is subject to high compliance regulation standards, obtaining tax relief to which its Page 32 of 42

33 customers are entitled is often not practicable. This undermines the objectives of treaties to reduce disincentives to cross-border investment in capital markets. Examples and further comments in relation to Treaty relief procedures have been included in Appendix 1. c) Inconsistencies in the VAT regimes Inconsistencies in the VAT regime as it currently applies across Member States is a potential impediment to a single market for capital. For instance, the inconsistency in VAT treatment between different types of pension fund arrangements, which in themselves vary greatly across Member States, can be a potential block to cross-border pension fund providers. The disparate VAT treatment of derivatives, commodities, outsourcing services and Investment Fund Management, to name a few, all obstruct progress to a true single market for Capital and hamper the establishment of a level playing field for financial institutions within the EU. The negative consequences of these disparities, such as the cascading of 'hidden' VAT through supply chains, and the additional costs these place on investors, disincentivise many economically stimulating activities. d) Potential implications of OECD proposals on Base Erosion and Profit Shifting (BEPS) In the context of its Action Plan on Base Erosion and Profit Shifting (BEPS) the OECD has proposed the addition of new provisions to bilateral tax treaties to prevent improper use of the treaties (i.e., Limitation on Benefits (LOB) and/or principal purpose test (PPT) provisions). As drafted, these provisions create the risk of disproportionate outcomes, investor uncertainty, and a shift from the current trend of granting treaty benefits at source. The proposals also fail to recognise the international nature of cross-border investment funds, the wide use of UCITs as investment vehicles of choice for many individuals and pension funds and the practical challenges investors, such as funds face in complying with complex documentation and other procedural requirements associated with claiming entitlement to tax treaty relief. We suggest that the Commission and EU Member States take a strong position at the OECD to ensure the final outcomes include a waiver from any LOB, PPT or other anti-abuse provisions for institutional investors where the risk of treaty abuse is low, such as widely-held Collective Investment Vehicles (CIVs), life insurance companies, regulated pension funds, and sovereign wealth funds. It will be essential that the final proposals reflect the approaches previously endorsed by the OECD for establishing CIVs entitlement to treaty benefits; and that the Commission and EU members states are encouraged to develop comparable approaches for non-civ funds, particularly pension funds; together with adequate guidance on how the PPT provision would be applied, if at all, to collective fund structures. e) Alleged inconsistencies in the tax treatment of debt and equity Page 33 of 42

34 In the EBF s view, a different legal, accounting and tax treatment of debt and equity is justified, since debt and equity are of a different nature; while equity represents an investment in a company, a cash loan is a service remunerated with a pre-agreed interest. Over the recent years, there has been a tendency in the EU and around the world, to strengthen anti-abuse measures limiting the tax allowance for interest payments under certain conditions. It has been the case with thin capitalization rules and the Action 4 of the OECD Action Plan on Base Erosion and Profit Shifting (BEPS). In the EBF s view, such measures render the financing of companies more costly and are inconsistent with the aim to enhance long term financing. In order to strengthen the equity structure (fundamentally of a long term nature), some countries such as Italy and Belgium have opted for the tax concept of Allowance for Corporate Equity, which basically allows tax deductibility of a portion of the increase of capital. This kind of measure responds more appropriately to the current need to strengthen capital markets and should be encouraged. It would also be advisable to envisage introducing harmonised tax incentives for investment in project finance instruments. 31) How can the EU best support the development by the market of new technologies and business models, to the benefit of integrated and efficient capital markets? Without competitive businesses, all efforts to create a capital markets union will likely be doomed to failure since only competitive businesses will be able to find investors prepared to fund their activity. A fundamental prerequisite for the success of a capital markets union is that of economic reforms which help to restore confidence in the capital markets. Above all in the countries hit by the crisis, such reforms are a sine qua non for improving the international competitiveness of their domestic economy. Only then new regulation will have a chance of creating a broader, deeper and more efficient capital market. Obviously, measures designed to integrate capital markets also have the potential to build trust. But first and foremost, there is a need to restore investor confidence without restoring investor confidence both in the stability of the capital markets and in sound economic and fiscal policy, all measures to establish capital markets union whatever its precise design will be vain. The European Commission can best support the development by the market of new technologies and business models by establishing a robust framework within which market participants can freely operate and competition flourish. Excessive focus on familiar business models, by contrast, is likely to succeed merely in cementing the status quo. Hence, it will be important to begin by identifying the necessary and appropriate preconditions for such a framework and then map out a strategy for achieving them. The green paper certainly mentions the key challenges: namely, company law, insolvency regimes, accounting rules and taxation. But it merely points out the complexity of the tasks involved, the lack of progress achieved by various attempts at harmonisation, to date, and categorises them as problems to be solved in the long term. Page 34 of 42

35 Yet the legislative decisions in which national differences may be allowed to remain in these areas and which need to be, and can be, harmonised will determine the level of capital market integration that can be achieved. Failing to address these decisions, putting them off to a later date and embarking instead on product regulation which can be implemented in the short term will not achieve the objective of a capital markets union. Additionally we would like to highlight that in the past years, regulatory developments, technological innovation and growing competition led to the increase of high frequency and algorithm trading and FinTech companies. Although technological development may contribute to the integration of capital markets (namely via the integration of activities taking place on different venues) this may present substantial negative impacts on liquidity (real or apparent) that has been suffering since the MiFID I promoted fragmentation of markets. Further research is needed regarding the benefits and the risks linked the so called FinTech services, namely on liquidity and volatility. Finally, the principle of same risks, same rules should be promoted regarding crowdfunding and other so-called shadow banking activities to ensure a fair regulatory treatment Sufficient phase-ins of new rules support efficient capital market models In the recent years, the heavy regulatory agenda has been lacking workable phase-ins. This has led to a situation where companies have had to change their systems and processers very quickly in order to comply in time. With sufficient phase-ins, the companies would have the possibility to analyse and develop best technologies and business models instead of implementing only that with which they need to comply. Finally the EBF strongly supports a higher reliance on digital solution for most requirements in terms of information, gaining consent and disclosure. 32) Are there other issues, not identified in this Green Paper, which in your view require action to achieve a Capital Markets Union? If so, what are they and what form could such action take? The publication of the green paper Building a Capital Markets Union marks the beginning of a major initiative by the European Commission to integrate capital markets in the EU. The objective of this capital markets union should be to make the European capital market more efficient, competitive and diverse, and thus also more resilient to possible shocks. A broader, deeper and more efficient capital market would then be a good basis for funding a dynamic and innovative economy in the EU. Reshaping the structure of the capital market in the EU to achieve capital markets union is therefore one of the most important regulatory tasks of the new European Commission. The EBF supports this goal. It is well established that despite the common terms used, the Capital Markets Union as outlined in the Green Paper is far from being defined as a project resembling the European Banking Union. In the absence of a single supervisory entity for the financial markets and despite the ambiguous statement in the Green Paper on possible increase in the supervisory convergence on implementing and enforcing the Single Rulebook, there has to be a certain proportion of supervisory measures towards centralisation as a means of ensuring proper and protecting to the investors rights functioning of the financial markets, which are not to be perceived as the supra legem opposite to an exhaustively regulated banking market. Page 35 of 42

36 Capital markets union in the sense of a completely integrated market should achieve three objectives, in the EBF view. 1. It should increase the efficiency of the capital market by bringing investment opportunities for savers and investors more into line with the demand for capital. This can be achieved by broadening the opportunities to diversify corporate finance and expanding the range of investments open to savers and investors. 2. It should make risk allocation easier by improving cross-border investment opportunities. This would help to absorb the effects of economic shocks on individual member states more effectively. 3. It should ensure that the capital market and the banking sector each contribute an appropriate share to funding the economy. The focus must be placed on the promotion of overall financing in the E.U., and not in substitution effects of funding sources. The green paper sets out a number of proposals for achieving these objectives and acknowledges that this will be a complex and long-term undertaking. It also provides an overview of the many problems that will need to be solved. The importance of banks in financing the economy The EBF strongly believes that the CMU is not an alternative to bank lending but complementary. The green paper also raises the question of the contribution the financial system can make to a country s economic development. The extent to which the structure of the financial system capital-markets-based or bank-based can influence the efficiency of its central functions risk management, the mobilisation of savings, company management, the allocation of resources and the provision of payment services is highly important to economic growth and ultimately provides the economic justification for the concrete design of a capital markets union. The green paper refers to funding conditions in the US and the difficulties in the ability of the European banking system to extend loans as a result of regulation passed in the wake of the financial crisis. Due to imposed deleveraging requirements, increasingly strict capital and liquidity requirements, higher funding costs and the deterioration in clients economic and financial situation (reflected in the increase of the delinquency of retail and corporate portfolios with consequences on the banks P&L via credit provisions), banks had to face growing restrictions on the possibility of granting loans. The interaction between banks and the capital market should not be perceived as a sort of zero-sum game in which the role of capital markets is to compensate for banks reduced lending capacity. There is no reason for this perception. It should, instead, be assumed that capital markets and banks are complementary elements of the overall financing structure. The EBF believes that banks have an important role to play for the CMU to succeed and ultimately for the EU to reach its growth objectives. There is no empiric evidence to suggest that one financial system or type of financial intermediation is better than another at promoting economic growth. On the contrary, both bank-based and market-based financial intermediation seem to have their own benefits and drawbacks. Given the complexity of financial and economic systems, it is not possible to conclude that a particular form of financial system is generally superior. Banks have historically been the main financing source in Europe, while the capital markets played a secondary role. Page 36 of 42

37 Banks will certainly continue to play a crucial role in financing, directly and as facilitators, considering the undeniable competitive advantages of the banking sector in terms of information management, experience in the development of products, monitoring of loans and investments, and risk management. These functions will be particularly important in the SME segment in which the banking relationship (associated with the accessibility of bank networks) plays a fundamental role in assessment of their credit risk by reducing information asymmetries. One characteristic of bank-based financial systems is that businesses, due to their generally long-term relationship with their bank, have greater access to foreign trade finance than they would under market-based systems. This enables businesses to invest on a more continuous basis than companies without such a relationship. They are also better placed to solve the principal-agent problem. In other words, the declared objective of capital markets union more dynamic growth in the EU can only be achieved if the capital market has a robust and profitable banking sector alongside it. This is also true for another reason: in Europe, banks are the main liquidity provider in capital markets. Finally, it should be borne in mind when building capital markets union that stringent regulation of the banking system should not trigger a migration of bad risks to the shadow banking sector without ensuring that systemic risks will be appropriately regulated there. The proposals for improving the efficiency of capital markets should go further The central goal of the capital markets union project is to achieve greater diversification of financing opportunities for businesses and reduce the cost of raising capital, especially for SMEs. The European Commission wishes to accomplish this by removing the obstacles to the movement of capital between investors and businesses and making capital markets more efficient. In principle, this is a sound objective since a broad supply of funding options can better meet differing needs both on the supply and the demand side. The green paper contains numerous proposals for better regulation of products and individual market segments. We have gone into these proposals in depth when replying to the related questions. But there is a risk that, by focusing only on individual products and their standardisation, the overall funding potential of the capital market will not be broadened and, instead, the status quo in the market segments involved will be set in stone. It is regrettable that the green paper confines its analysis to market segments and products that have played a role in funding the economy in the past and where the Commission expects the elimination of further obstacles to unlock further market potential. This takes an unnecessarily narrow view of the funding potential of capital markets. Current developments in financial intermediation are addressed only in passing take, for example, the reference to crowdfunding. Since the financial crisis at the latest, however, the regulatory spotlight has increasingly turned to financial intermediation through non-banks. Non-banks are seen as innovative. Credit funds, for example, already offer a new approach to financing SMEs, in particular. It is largely unclear at present to what extent these new players will influence corporate finance in the long term. The capital markets union initiative should therefore also take account of the European Commission s measures to regulate the shadow banking sector and should itself address the question of regulating non-bank financial intermediaries and of closing any gaps which may still exist. Page 37 of 42

38 The green paper s proposals for improving access to the capital market for businesses and investors should go further If the capital market is to realise its full potential, it is absolutely essential that businesses and investors have free market access. This is already largely the case in Europe. The green paper focuses on the disadvantages facing smaller companies as a result of their size and on the high cost of accessing the capital market. In addition, it notes a lack of interest on the part of investors in long-term investments and risk capital. These problems are not new. There have been numerous attempts to make it easier for SMEs to tap the capital market. It is well known that raising money on the capital market is significantly more expensive than taking out a bank loan and that more paperwork is involved. This is essentially because the two sectors are organised and function in fundamentally different ways. In the light of past experience, we consider it is unlikely that the demand for bank loans can simply be diverted to the capital market by lowering the costs of access and standardising products. The European economy is dominated by small companies. This reflects not only history and culture, but entrenched rules that discourage firms from expanding and owners from selling. The concept of SMEs covers a broad range of businesses that seem not to be fully taken into account in the Green Paper. We would highlight the fragmented universe of SMEs for which the bank intermediation is crucial for reasons of reduction of information asymmetries and efficient credit assessment and monitoring. This segment largely surpasses the range of SMEs that have the expertise and the means to regularly access capital markets. Before making it easier for certain companies to access the capital market by lowering the associated disclosure requirements, policymakers should consider the potential threat of such a measure to the stability of these market segments. Among the several initiatives aimed at improving SMEs access to capital markets it is worth mentioning other initiatives that can be taken by the industry and that do not need policy intervention. For instance, further initiatives to support both SMEs waiting list and investors looking for investment opportunities may be business support services such as: connecting SMEs to different types of investors; due diligence and prospectus writing; IPO road show support; accountants and legal support; pipeline information on upcoming IPOs. The capital market s role in funding innovation Liquid capital markets will boost the process of moving capital from slowly growing sectors to dynamic innovative industries. A capital-market-based financial system would consequently have certain advantages when it comes to funding high-tech businesses and start-ups. Thus the EBF supports the green paper s call for greater venture capital funding. But this approach is not new either. What is needed is an analysis of why previous initiatives have had so little success. It is nevertheless worth noting that, in many countries, the long tradition of bank-based funding has influenced companies approach to innovation. Innovations developed by start-ups are in the minority. Instead, companies have developed their potential for innovation on the basis of Page 38 of 42

39 long-established businesses, with a high degree of success. Many are world market leaders in their industry. Key to take adequate account of the effects of regulation which run counter to the objectives of capital markets union The success of the initiative to make capital markets more efficient will also depend on whether or not markets can be made broader and deeper and on the availability of the necessary liquidity. The seven years since the outbreak of the financial crisis have seen the launch and implementation of numerous regulatory projects with a direct or indirect influence on capital markets. This regulation sometimes runs counter to the objectives of capital markets union. Take, for instance, bank structural reform or the financial transaction tax. Costs and risks of a capital markets union The EBF believes CMU will also have to face some possible costs. It would be important, in fact, to analyse the potential costs and risks involved with the CMU agenda. The price will probably also take the form of new systemic risks, assuming that capital markets union is to be understood as an innovative and expanding market. The success of capital markets union will therefore need to be partly judged on its ability to identify systemic risks sufficiently early to avoid systemic crises. Only at the start of the financial crisis did people begin to take notice of systemic risk. The focus up to now has been above all on systemic risks emanating from banks. Much less is known about systemic risks associated with capital markets. There has been little research, for instance, on which market segments might see a run, how this could be predicted in advance and what preventative measures could be taken. So it will be a huge challenge to take effective precautions against systemic risk in a capital markets union. Regulation to establish capital markets union may therefore enter unchartered territory in this respect. Page 39 of 42

40 Appendix 1: Examples and additional comments in relation to the inefficiencies of Treaty relief procedures Exchange of information between governments is an essential part of withholding tax systems and are described in the EU Recommendation as well as the TRACEIP. As we know on the 9 th December 2014 the EU Commission amended Council Directive 2014/107/EU to amend Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation (DAC). Specifically Article 8 of Directive 2011/16/EU will be extended to include the same information covered by the OECD Model for AEOI and the Common Reporting Standards (CRS). i The TRACE system envisages Automatic Exchange of taxpayer Information, and notes that to the extent the information is exchanged in a timely fashion the residence country could quickly inform the source country that an investor who claims to be resident thereof is in fact not. It also argues that countries receiving such investor specific information would be equipped with additional tools to focus their enquiries on the specific tax payers that may present issues. Due diligence rules and procedures. With the introduction of the DAC Member States are required to implement rules to require their financial institutions to implement reporting and due diligence rules which are fully consistent with those included in the CRS and document the tax residency of each customer. Need to align due diligence processes specifically with AML/KYC rules: as a result, all banks and intermediaries will now be forced under the DAC to collect and report residency information on all of its customers. Customers will be required to self-certify their tax status. The features of self-certification coupled with AEOI are discussed in both the T-BAG and the TRACE reports. Liability. It is recognised that governments will seek to ensure that they have the ability to recover any tax under-withholding in an effective and efficient manner. It is further recognised that the most efficient approach may involve the Tax Authorities in a source country seeking repayment of taxes from the FI. The new system for automatic exchange of information between EU member states and some OECD member countries is tackling tax evasion. It is clear that the political heart of these agreements reflects a notion of no more borders and it is clear tax authorities will be working even closer together to address cross border tax matters. It would therefore appear that any pre-existing barriers to address collection of under-withholding are removed. As a result, although the issue of cross-border tax relief has been discussed for many years, nothing has changed, in fact the process has become more cumbersome with investors often foregoing due entitlements. Additionally, studies undertaken in 2001 focused on access to tax relief stipulated in double taxation agreements. However, increasing numbers of global cross border portfolio investors are filing claims under EU Law to recover withholding tax suffered on dividend income received from companies resident in the EU. These claims are based on an interpretation of the free movement of capital provisions of the Treaty on the Functioning of the European Union (TFEU), that a non-resident recipient of a dividend should not be taxed, by the source state, more heavily than a comparable resident entity. Page 40 of 42

41 These claims have been referenced to the relevant tax cases that have been submitted: Denkavit, FOKUS bank, FII GLO and most recently the Santander case in France. When these cases are upheld in the EU courts the result is a change in a source countries tax laws provisioning an equal treatment where a non-resident investors can prove comparability. Other considerations The current existence of a proliferation of forms and documents required to apply for tax relief in source countries could be replaced with a best practice self-certification that could be solicited from custodian account customers by financial institutions looking to secure tax relief for their clients. Self-certification could be seen as an opportunity to move towards harmonisation of forms. In connection with the claiming of cross border tax relief one significant issue is ensuring that the taxpayer has access to information to assist them in determining whether relief is applicable and how it can be claimed. This issue becomes significant because residency criteria differ from country to country and requires familiarity with the legal standard, this determination can often be difficult for taxpayers to make. It would be very helpful if governments publish guidance on this issue together with standardised information on what withholding tax relief benefits are available and how those benefits can be claimed. Intermediary tax agent solutions (similar to the QI regime) would help local banks because it would enable the clients of the local bank to become a tax intermediary thereby reducing some of the administrative burdens the local banks face when providing tax relief services to global customers. Benefits - An intermediary system can also move the liabilities. Transferring tax liabilities to Authorised intermediaries as envisaged under the TRACE system. - An intermediary system will provide additional oversight to assist governments with any additional monitoring of treaty claims they undertake. For example governments concerned with duplication of claims, dividend stripping etc. i. The costs of implementing an exchange of information system will require each adopting country to make significant investments in technology, assign resources to implement legislation and issue local guidance - all of which would be required to implement a simplified withholding tax relief at source system. ii. iii. It also seems likely that customers of financial institutions who a simplified withholding tax relief at source system would be incentivised to identify their residence for tax purposes. This increases the probability that they will themselves report information to their home country s tax authorities. These factors will provide governments with yet more tools to crosscheck information. Restrict the operation of a simplified withholding tax relief at source system to an AI located in a country with which the source country has a bilateral agreement comparable Page 41 of 42

42 to the CRS. This would have the effect of encouraging more financial centers to adopt the CRS. Governments may argue that a simplified withholding tax relief at source system will require extraterritorial approaches to audit their respective tax collection systems and those seeking to audit outside of their home country will use the Mutual Agreement Procedures in double tax treaties and it is clear that extraterritorial audits will be supported by governments. This is simply because of global information sharing agreements such as US FATCA/IGAs and CRS/DAC. i OECD Automatic Exchange of Information (AEOI) also commonly known as the Common Reporting Standard (CRS): Page 42 of 42