Niall Bohan, overseeing the European Commission’s planned Capital Markets Union, said asset managers will benefit most from the initiative but the sector need to provide cheaper products for retail investors.
Bohan, head of unit, Capital Markets Union, Directorate-General for Financial Stability, Financial Services and Capital Markets Union at the European Commission made a keynote address at the European Post-Trade Conference in London today hosted by the Association for Financial Markets in Europe.
The Capital Markets Union action plan was published last September and sets out a programme of 33 measures, focused on six objectives, which aims to establish the building blocks of an integrated capital market in the European Union by 2019 in order to break the dependence on bank loans in providing corporate financing . Bohan said: “In the EU 75% of funding for small and medium-sized enterprises comes from bank debt, and that is more than 90% in some states.”
The CMU aims to accelerate funding for high-growth firms who are starved of alternative forms of finance in many parts of the EU, despite being responsible for one-third of job creation. To catalyse private investment into venture capital markets in Europe, Bohan said the Commission will ask private sector asset managers for expressions of interest from in managing a fund-of-funds of between €500m and €1bn to invest in European venture capital.
Last month the Commission published its first CMU status report. Bohan said: “We have made progress on the flagship initiatives of reviving securitizations and simplifying the prospectus directive.”
The Commission has also taken action to boost infrastructure investments by reducing the Solvency II capital charges for insurance companies investing in infrastructure projects and European long-term investment funds (ELTIFs). These changes came into force last month.
Over the next six months the focus for CMU will be on asset managers and investment companies. “Asset management will benefit the most from CMU but the industry needs to make products that are more attractive and affordable for retail investors,” added Bohan. “The industry needs to raise its game in terms of its value proposition as fees are too high due to costly distribution systems.”
He continued that European personal pensions need to be developed as those people now entering the labour market will have between 14 and 20 jobs in their lifetimes and need pensions which are transferable between jobs and across borders.
The CommissIon will publish a consultation document before the summer as the first step in evaluating the case for a policy framework to establish a voluntary market for European personal pensions. It is also due to launch a consultation to improve the passporting system for investment funds so they can genuinely compete across EU borders.
“The average cost of a fund in the EU is 175 basis points versus 75 points in the US so the industry needs to provide better value to retail investors,” Bohan added. “The retail sector is holding 30% of assets in non-interesting bearing bank accounts which is a damning indictment of the fund industry.”
Bohan said the focus will switch to making the post-trade environment more efficient next year. A European Post-Trade Forum of industry experts started work in March last year to advise the Commission and is due to report in February 2017. The Commission also aims to publish a study this year on conflict of laws as regards securities ownership and debt assignment.
“The litmus test for CMU will be if cross-border transactions become as cheap as domestic transactions,” Bohan added.
Featured image by Konstantin Yuganov/Dollar Photo Club
