Achieving the Capital Markets Union is crucial for the EU to address the challenges posed by Brexit, and support developments in sustainable finance and fintech, says the chairman of the European Securities and Markets Authority.

Steven Maijoor

For the past five years, numerous European institutions have been working on the Capital Markets Union (CMU) project, and the European Securities and Markets Authority (ESMA) has played a pivotal role in these joint efforts through a range of activities. We have been steadily increasing the convergence of national supervisory actions and practices across the EU, we have vastly expanded collecting, analysing and publishing data on financial market risks and developments in the EU, and we have taken our first product intervention measures.

The consequences of the Brexit referendum in the UK will significantly impact the structure of the EU financial markets as we know it today. A significant number of UK market participants are relocating to the EU27, increasing the role of various financial centres here, and Brexit may prove to be a unique opportunity for the EU27 to expand the function of its capital markets in funding the real economy.

Indeed, despite more than 40 years of integration efforts, and some successes, both through regulatory measures and organic developments, we have not achieved a single capital market that would offer sufficient risk capital for European companies and counterbalance the banking system. It is this which I would like to reflect on in a little more depth.

The CMU project is entering its sixth year and I want to reflect on progress in a few key regulatory areas – namely sustainable finance, financial technology and effective supervision, with both global and European relevance.

Sustainable finance

Sustainable finance is one of the main building blocks of the CMU, and an excellent example of how well-developed financial markets can help to achieve fundamental shifts that benefit everyone’s lives.

While financial markets regulators cannot address the main climate change drivers directly, we need to ensure that all asset risks are considered and that financial markets respond to investors' (changing) preferences. So, while securities regulators do not prescribe certain behaviours or give directions to the market, we must instead ensure that the disclosure, transparency, conduct and governance frameworks consider assets’ sustainability risks and realise that more investors are now assessing assets’ sustainability impact when making investment decisions.

In early 2019, the EU agreed legislation requiring mandatory disclosures by financial market participants on environmental, social and governance factors. ESMA will soon consult on draft implementing measures under this new law, currently being developed with the European Banking Authority and European Insurance and Occupational Pensions Authority to achieve similar requirements and a level playing field across the banking, insurance and securities sectors. The EU taxonomy regulation, while still under negotiation, is expected to be agreed by early 2020.  

The client demand for sustainable investment opportunities, both on the institutional and retail side, is a global phenomenon. Therefore, at the global level we must do our utmost to align our developing regulatory frameworks regarding sustainability. If we do not achieve this, we run the risk that international market players – such as large asset managers, insurance undertakings and pension funds – will face competing obligations and methodologies. I believe broader engagement is needed and I hope that all key jurisdictions will work together on this issue.

Fintech developments

The second area I want to address is the development of new technologies in finance, and the importance of ensuring the benefits of their use are complemented with appropriate regulatory and supervisory measures that avoid unnecessary risk or consumer detriment.

While this area of the CMU, from a regulatory perspective, has not advanced as fast as sustainability, there are a number of similarities: the steep learning curve for regulators; new market developments with the potential to disrupt current funding flows of the economy; and a global perspective is necessary for an effective response.

For example, on virtual currencies and initial coin offerings, our approach, following efforts to exchange views and align our thinking on their regulation across the EU and globally, to a crypto-asset is simple: when it has the characteristics of a financial instrument, it should be regulated and supervised as one.

Finally, on the topic of technology, while as a regulator I focus on risks, I want to underline that technological developments can offer simpler, faster and more efficient solutions, which result in benefits to end-clients. We have all experienced how technology has improved everyday life, so similar improvements in financial services can be an important contribution to the CMU.

Effective supervision

The final aspect of the CMU is effective supervision of EU financial markets. Over the past two years, the EU has strengthened the supervisory system for financial markets, including steps towards stronger powers for ESMA to ensure consistent supervision across the EU’s national supervisors and more direct supervision at EU level. As a result, ESMA will have more direct supervisory responsibility for certain market entities, including both EU and third-country market participants active in EU markets through equivalence and recognition. There are good reasons for bringing certain important third-country entities under our supervision.

With the UK soon to leave the EU, the use of the EU equivalence model is expected to grow once an orderly exit is agreed and implemented – not only in terms of additional decisions but also through the proportion of non-EU market participants active in the EU. From this perspective, it is important that the EU creates supervisory mechanisms concerning the most significantly important market infrastructures – such as central counterparty clearing houses (CCPs) – to maintain financial stability, orderly markets and consumer protection within the EU. ESMA will begin its work in supervising certain third-country CCPs in early 2020.

Second, ESMA will receive additional resources to monitor relevant regulatory and supervisory developments in jurisdictions that are deemed equivalent. We aim to approach this new task through enhanced co-operation and more frequent exchanges with fellow regulators. Finally, in 2022, ESMA will take over additional direct supervisory mandates over EU entities, and the mandate regarding the recognition of third-country benchmarks.

Expanded activity

Having considered the progress made, and bearing in mind a new EU legislative cycle has just started, I have a clear message: our work towards the CMU should not only continue but should be stepped up and broadened in terms of activity. There are two areas that particularly need a co-operative approach from policy-makers, regulators and market participants: expanding the retail investors' participation in capital markets and facilitating more effective funding channels for small and medium-sized enterprises.

A large investor base helps to finance the economy and allows investors to ensure effective long-term financial planning that cannot be achieved through savings deposits. The two areas will need a careful balance between robust investor protection and attractive conditions for risk-taking. Technological innovation and related potential efficiency gains may support better outcomes in these areas.

Building up the CMU in the aftermath of Brexit will also have a different, global perspective. In case of an orderly exit, EU and UK institutions need to implement the Withdrawal Agreement, including the commitment to conclude equivalence assessments that, in turn, inform decisions that would mutually benefit market access under robust regulatory and supervisory arrangements. Whatever the developments in the implementation of the Withdrawal Agreement, they should not distract from the benefits that can be achieved from a CMU open to market participants from outside the EU and benefiting from better integration with global financial markets.

Useful tool

The equivalence framework is an effective tool to keep EU financial markets open to business from outside. Indeed, with more than 120 positive equivalence decisions in the area of securities markets across various legal frameworks and jurisdictions, the EU has been the world leader in applying the 'deference' principle, which the G20 agreed to apply in the aftermath of the financial crisis to avoid unnecessary market fragmentation. Already today many foreign market participants, such as trading venues or CCPs, can do business here while the EU relies on their home country regulation and supervision.

While the equivalence model will evolve in the coming years, including a more prominent role for ESMA in supervising certain systemically important market infrastructures from equivalent third countries, and with enhanced monitoring activity, the underlying objective of an extensive use of deference by the EU should not change.

This will require ESMA – and relevant European authorities – to step up its engagement and co-operation with its foreign counterparts, including those from the UK. A deep, liquid and vibrant financial market in Europe can only be successful with the active and direct participation of market players from around the globe.

Steven Maijoor is chairman of the European Securities and Markets Authority.

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