Brussels wants an integrated, stronger EU capital market with limited access for the post-Brexit U.K.
It won’t work, a growing number of financial players say.
They warn that while the European Commission’s capital markets union (CMU) project aims to open up capital flows and investment in the EU, other proposals — many Brexit-induced — have a protectionist bent.
Speaking at a conference in Brussels last week, Barclays CEO Jes Staley said the key to the CMU’s success is “size … we need to work toward a pan-European market area, beyond the EU27,” adding: “Some people call this idea ‘CMU plus,’ but it’s the only version of the plan that can achieve what we need.”
Staley is the first to publicly call for the U.K. — with its unparalleled financial expertise — to play a role in the project. But others echo his view.
“The reality is that something is happening, not because of our choice, and we need to adapt to it” — Commission official
Pablo Portugal of the Association for Financial Markets in Europe said: “Markets benefit from economies of scale — that is something we encourage policymakers to consider.”
Kay Swinburne, a British MEP from the European Conservatives and Reformists group, agrees that financial markets are global “and anything that impedes access to those funding sources or artificially stops the flow of capital will only add costs to the economy without any local gain.”
The CMU kicked off in 2015 under former Commissioner Jonathan Hill, with a key objective of unlocking more investment from the EU and the rest of the world. But with the British commissioner’s resignation following the U.K.’s vote to leave the EU, the future of the project was thrown into doubt: Europe’s largest financial center would no longer be part of the initiative.
Valdis Dombrovskis, the Commission vice president who took over Hill’s financial services portfolio, has gone to great lengths to stress that the departure of London makes the CMU “more challenging, yet more important.” For example, a leaked communication from June 2017 says there is “need and urgency” to further develop EU capital markets as a result of Brexit.
“I don’t think the CMU is suffering because of Brexit. The reality is that something is happening, not because of our choice, and we need to adapt to it,” a Commission official said. “We maintain the same ambitions for the CMU but have recalibrated a bit what we’re doing in light of the U.K. leaving.”
But there is a concern that the current EU policy and political environment doesn’t chime with the overall aim of the CMU to make access to finance easier.
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Some fear certain EU financial regulations in the works may in fact restrict the free flow of capital across EU member countries and post Brexit, a move toward a “fortress Europe” may make things more challenging.
“Most [post-Brexit] models between the EU and non-member states would not give U.K. financial services the access that is inherent to the concept of a capital markets union,” said Michael Collins, CEO of Invest Europe, a private equity trade association.
“The U.K. could potentially be left relying on access provisions set out in existing EU law, such as the [Alternative Investment Fund Managers Directive] third-country passport. If Britain wants something ‘bespoke,’ as it has indicated, then a unique arrangement could allow the U.K. to be a full player in the CMU. But there’s nothing concrete on the table that delivers that,” Collins said.
According to Alexandra Hachmeister, chief regulatory officer at Deutsche Börse, “It’s fair to say the CMU will benefit from U.K. investment, and investors in the U.K. need investment opportunities in the EU27. This is where the industry sits. If we have the capital in the U.K., why shouldn’t it still flow to the EU27 for investment?”
If Europe is becoming more closed-off in financial services, Brexit can claim a big chunk of the responsibility.
A view of the skyline of Frankfurt and the financial district | Thomas Lohnes/Getty Images
Take equivalence. Equivalence exists in EU regulations, including its derivatives rules (the European Market Infrastructure Regulation), and allows countries with similar enough legislation to the EU to operate under their own rules without forcing firms to comply with two sets of laws. But since Brexit, the Commission has sought to tighten the screws on how other jurisdictions can obtain equivalence and therefore, access to EU clients — particularly when countries are deemed to be “high impact,” such as the U.K.
AFME’s Portugal notes the lack of equivalence affected the new EU framework for securitization, the process in which banks package loans into securities and then sell them to investors — something the EU doesn’t do enough of.
“There were proposals from the European Parliament on a regime for third-country [securitizations],” he says. “We felt that was desirable because the U.K. represents a good portion of the current EU securitization market, and it’s in the interest of the EU to have [a] market with scale and liquidity.”
If moves such as the one on securitization mean the EU27 is boxing itself in, it goes against the aims of the CMU.
The final securitization rules, agreed on in May 2017, did not include a third-country framework.
Financial players caution that if moves such as the one on securitization mean the EU27 is boxing itself in, it goes against the aims of the CMU and could act as a disincentive for capital markets activities in the bloc.
Ultimately, this may even force firms to go to the U.S. or Asia in order to find financing — surely the opposite of what Europe wants.